[Senate Hearing 107-856]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-856
 
                           PREDATORY LENDING
=======================================================================

                             JOINT HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                      MAY 14, 2001--BALTIMORE, MD

                               __________

         Printed for the use of the Committee on Appropriations




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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
                                     MARY L. LANDRIEU, Louisiana
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terrence E. Sauvain, Minority Staff Director
                                 ------                                

           Subcommittee on VA, HUD, and Independent Agencies

                CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           PATRICK J. LEAHY, Vermont
LARRY CRAIG, Idaho                   TOM HARKIN, Iowa
PETE V. DOMENICI, New Mexico         ROBERT C. BYRD, West Virginia
MIKE DeWINE, Ohio                    HERB KOHL, Wisconsin
TED STEVENS, Alaska (ex officio)     TIM JOHNSON, South Dakota

                           Professional Staff

                              Jon Kamarck
                          Carolyn E. Apostolou
                                Cheh Kim
                        Paul Carliner (Minority)
                     Gabrielle A. Batkin (Minority)

                         Administrative Support

                              Isaac Green
                       Nancy Olkewicz (Minority)
            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah              CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                ZELL MILLER, Georgia
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada                  DEBBIE STABENOW, Michigan
                                     JON S. CORZINE, New Jersey

                   Wayne A. Abernathy, Staff Director
     Steven B. Harris, Democratic Staff Director and Chief Counsel
           Geoffrey P. Gray, Senior Professional Staff Member
         Jonathan Miller, Democratic Professional Staff Member
                            C O N T E N T S

                              ----------                              
                                                                   Page
Statement of Senator Barbara A. Mikulski.........................     1
Statement of Senator Paul S. Sarbanes............................     3
Statement of Hon. Martin O'Malley, Mayor, Baltimore, Maryland....     5
Statement of Harry Smith, Citizen................................     8
Statement of Chassie Adams, Citizen..............................     9
Statement of Vincent Quayle, St. Ambrose Housing Aid Center......    10
Statement of Kenneth Strong, Director of Research and Policy, 
  Community Law Center, Baltimore, Maryland......................    14
    Prepared statement...........................................    18
Statement of Paul T. Graziano, Commissioner, City of Baltimore, 
  Department of Housing and Community Development................    34
Joann Copes, Director of Development, Baltimore Housing and 
  Community Development..........................................    34
Prepared statement of Paul T. Graziano...........................    37
Statement of Laurie Maggiano, Director, Asset Management and 
  Disposition, Single Family Division, Department of Housing and 
  Urban Development..............................................    41
    Prepared statement...........................................    45
Baltimore Predatory Lending and Flipping Task Force Year One 
  Accomplishments................................................    47
Statement of Stephen M. Schenning, Acting United States Attorney, 
  District of Maryland...........................................    49
    Prepared statement...........................................    51


                           PREDATORY LENDING

                              ----------                              


                          MONDAY, MAY 14, 2001

        U.S. Senate, Committee on Banking, Housing, and 
            Urban Affairs, and Committee on Appropriations, 
            Subcommittee on VA, HUD, and Independent 
            Agencies,
                                                     Baltimore, MD.
    The subcommittee and committee met at 9:12 a.m., in the 
Curran Room, Baltimore City Hall, 100 North Holliday Street, 
Baltimore, Maryland, Hon. Barbara A. Mikulski presiding.
    Present from the Committee on Appropriations: Senator 
Mikulski.
    Present from the Committee on Banking, Housing, and Urban 
Affairs: Senator Sarbanes.

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


                statement of senator barbara a. mikulski


    Senator Mikulski. Good morning, everybody. I would like to 
convene this hearing. It is a joint hearing between the Senate 
Appropriations and the Senate authorizing committee on the 
issue of flipping. In the United States Senate, Senator 
Sarbanes and I are a one-two punch on the issue of housing. 
Senator Paul Sarbanes is the ranking member of the Committee on 
Housing and Banking and in charge of all of the housing 
authorization. In addition to that, he is on the Budget 
Committee. I am on the Appropriations. So he is the Federal law 
book guy; I am the Federal checkbook lady as the ranking member 
on the Subcommittee on VA-HUD in Appropriations.
    Senator Sarbanes and I do work as not only Team Maryland, 
but Team USA on the whole issue of housing opportunity and 
empowerment. So we are here this year to hold an anniversary 
hearing on what has happened on the subject of flipping.
    We are delighted that Mayor O'Malley could join us this 
morning. Mayor, your two United States Senators have some very 
good news for you. We wish this morning to announce a $5 
million grant from the Department of HUD to the Baltimore 
Housing and Community Development Agency to establish a 
victims' clearinghouse and to provide funds for the city to 
rehabilitate Baltimore's neighborhoods, particularly those that 
have been gouged by the locusts of predatory lenders.
    First we have $3 million for something called the Healthy 
Neighborhood Initiative, and this will provide funds for 
homeowners in Bel Air-Edison, Gwynn Oak, Midtown, Belvedere, 
Reservoir Hill, and Southern Mondawmin for home improvements, 
to help attract more homeownership to targeted neighborhoods.
    One hundred fifty million dollars for neighborhood 
stabilization to stabilize neighborhoods by supplying money to 
purchase and repair vacant housing in Baltimore. I know Mr. 
Graziano wants to elaborate in more detail on this.
    Last, but not at all least, a $500,000 grant for a flipping 
victim clearinghouse in which an expert in housing counseling 
at Baltimore's St. Ambrose will run a clearinghouse to serve as 
a one-stop shop for victims of predatory lending, otherwise 
known as flipping. You know, flipping has destabilized 
neighborhoods, gouged the poor, and ripped off the taxpayer, 
and we have been fighting this issue from the very able work of 
the U.S. Attorney, the FBI, and the Postal Inspector.
    But the battle is really being done in the neighborhoods. 
We are looking forward to hearing from them.
    Before I elaborate more on my opening statement, Senator 
Sarbanes, did you want to say something about the grant?
    Senator Sarbanes. No.
    Senator Mikulski. We hope that these funds will help the 
victims of flipping and also help with neighborhood 
stabilization. As I said, flipping does three things: It 
destroys the dreams of those who wish to be first-time home 
buyers; it wrecks neighborhoods; and it gouges taxpayers. Once 
again, we say to the flippers: You can run, but you cannot 
hide. We will be prosecuting you. We will be investigating you. 
We will be driving you out of the neighborhoods.
    But we not only want to stop flipping, we want to be able 
to restore the neighborhoods and we want to be able to restore 
what has happened to the people in the neighborhood.
    I want to thank Council President Dixon for allowing us to 
meet here. As a once-again city councilwoman, I am happy to be 
back here in City Hall. You know, once a city councilwoman, 
always a city councilwoman.
    I want to thank John O'Donnell for his pioneering work on 
this. But most of all, I want to thank all of the neighborhood 
groups that have fought so valiantly: St. Ambrose, ACORN, the 
Community Law Center, people like Andrew Weitzman, who is a 
metaphor for other dedicated pro bono lawyers.
    Today's hearing is to answer three questions: What have we 
learned over the past year? What has worked and what has not? 
Where do we go from here? What happens to the victims of 
flipping? What are we doing to prevent flipping, and what are 
we doing to clean up the mess created by flipping?
    Last year I met with local community leaders in church 
basements to hear what is going on. That is what prompted the 
whole issue of our involvement in it. FHA has become an 
unwitting participant in an epidemic. Flippers were actually 
targeting low-income people, mostly African Americans. 
Regrettably, Baltimore was the worst in the Nation through lax 
property disposals and lax oversight. FHA was actually 
supplying some of the houses to the flippers.
    We went directly to Secretary Cuomo and we began a reform 
effort. Senator Sarbanes jumped right in and created 
outstanding authorizing legislation to prevent and deal with 
predatory lending. Congressmen Cardin and Cummings were most 
helpful, and our Federal agencies stepped in to prevent 
flipping. Law enforcement has been sending crooks to the 
slammer, where they belong. We are going to look forward to 
hearing from the U.S. Attorney to tell us more about it.
    Unfortunately, HUD underestimated the size and complexity 
of the flipping problem in not only Baltimore, but everywhere. 
Senators come up to me every day and say: What is happening, so 
we can get cracking on the Detroits, the Chicagos, and others?
    I know the HUD administration is involved aggressively. 
Senator Sarbanes and I met recently with Secretary Martinez to 
make sure a process that had gotten off track is back on track. 
I want to thank Secretary Martinez for his most prompt and 
collegial response. I know he has delegated the responsibility 
to Ms. Maggiano, who we will be hearing today, to really take a 
good look at Baltimore so we can get our momentum going once 
again.
    We have heard about broken dreams and we want to make sure 
that we are dealing with the stabilization of the 
neighborhoods. This morning we want to hear about the troops on 
the front lawn. We want to hear from a very able prosecuting 
team and we want to hear from HUD about where do we go from 
here, what lessons will we learn.
    I will not let the flippers win. We will not let the 
flippers win. Baltimore is going to win. We went to the 
Superbowl, we have won the heavyweight champion of the world, 
and we will be a model of the Nation on how to clean up and 
clear out the flippers and restore our neighborhoods.
    Now I would like to turn to my colleague, Senator Paul 
Sarbanes.


                 statement of senator paul s. sarbanes


    Senator Sarbanes. Thank you very much.
    I want to commend Senator Mikulski for scheduling this very 
important hearing of the VA-HUD Appropriations Subcommittee to 
review how much progress has been made or has not been made, as 
the case may be, in resolving the problem of flipping since we 
held such a hearing last year. I think it is only through such 
oversight that we can assure ongoing accountability to the 
people who have been victimized by this terrible practice.
    Last year Secretary Cuomo and Commissioner Apgar, the 
Commissioner of FHA, responded to the stories of the misuse of 
FHA insurance. First, working with local representatives, two 
of whom will testify today, they developed a series of tools to 
address the flipping cases where FHA was involved. These 
included re-underwriting the mortgages to a level where the 
buyer could afford to pay, helping to repair credit, providing 
relocation assistance where ownership was not a reasonable 
option.
    Unfortunately, the Department has been slow to make good on 
those commitments. Now, you know, we can engage in a long sort 
of effort at blame-placing or we can try to move ahead and get 
things back on the right track. I think we have made the 
judgment that we want to do the latter. In other words, we want 
to move ahead. We want to solve this problem and we want to see 
what can be done about it.
    Senator Mikulski and I have met a number of times with 
Secretary Martinez. Our staffs have been in close touch with 
his office. We think the Secretary wants to solve the problem. 
We urged him to appoint a person at HUD headquarters to be the 
point person and to make sure we did not lose momentum again. 
We are putting someone right on the griddle with the spotlight 
trained on them, and that is Ms. Laurie Maggiano, who is here 
with us this morning. We are delighted she is here and we look 
forward to great things from her.
    Second, in addition to providing redress to those 
victimized by the fraud, we want to work with HUD to prevent 
these problems from going forward. To that end, Senator 
Mikulski and I will soon be introducing legislation to put the 
HUD credit watch program into statutory language. This will 
help identify FHA lenders who make too many bad loans and get 
them out of the program.
    Simply put, a part of that legislation will also seek to 
ensure that HUD has the authority to invoke the remedies 
proposed by the task force for here in Baltimore and elsewhere. 
HUD actually has a draft of that legislation now which has been 
sent down to them. We are currently awaiting their comments and 
suggestions and look forward to their very prompt response.
    Let me just say as an aside, because I do not want to lose 
a broader focus, FHA continues to be a strong and effective 
program for the vast majority of Americans. Millions of 
families have achieved the American dream because they had 
access to mortgages through FHA, mortgages they would not 
otherwise have been able to obtain.
    But the program is being abused. It is clear that some very 
fast operators have moved in and are playing this to every 
advantage and that lots of people are suffering as a 
consequence. These predatory lenders who target vulnerable 
people offer high-cost loans packed with unnecessary and unfair 
fees, costly to the borrowers, extremely profitable to the 
lenders, stripping equity right out of the homes.
    We have got the regulators increasingly sensitive to this 
issue and, as Senator Mikulski said, we are going to stay with 
this thing until these people are vanquished.
    Now, just a day or so ago we received a letter from the 
Department, and I am hopeful that the local people will comment 
on this, indicating the steps the Department has put in place 
as a consequence of our meetings with Secretary Martinez: One, 
the appointment of a team of senior officials and staff 
dedicated to supporting the work of the Baltimore Flipping and 
Predatory Lending Task Force. I have already mentioned Laurie 
Maggiano, Director of Asset Management in the Disposition 
Division, is coordinating the actions of this team.
    Second--and I am laying this out because we want the local 
people to sort of give us their reaction, in a sense, in terms 
of exactly what is happening on the ground--foreclosures have 
been suspended on all loans that have been referred to the 
Department as potentially predatory by mortgage interest groups 
or housing counseling agencies.
    Three, HUD and the task force have revised the scope to 
include any properties that were overvalued as a result of 
either flipping or a severely deficient property condition at 
the time of loan origination.
    Four, expanded the geographic area for flipping assistance 
to victims, now to include the entire city of Baltimore. I am 
anxious for our local people to react to that.
    Finally, let me say I join Senator Mikulski in being very 
pleased at this announcement of the grant, the $5 million 
grant. Mr. Mayor, we never want to come with empty hands here, 
and we are delighted that you are able to be here with us this 
morning.
    These funds will enable us to establish a flipping victim 
clearinghouse, a neighborhood stabilization program, purchase 
and repair vacant housing in Baltimore neighborhoods, and a 
Healthy Neighborhoods Initiative for homeowners in particular 
areas in order to upgrade their properties and to seek to 
attract more homeowners into the target neighborhoods. We think 
all of this will give the city some additional tools with which 
to move ahead to improve investment in the neighborhoods, and 
not only to deal with the flipping, but also to deal with the 
broader problem of making these neighborhoods more attractive 
so people will want to stay in them and other people will want 
to move into the neighborhoods.
    So I am very pleased that we are able to hold this hearing 
this morning. I look forward to hearing from the witnesses. 
Again, I want to close by once again thanking Senator Mikulski 
for scheduling the subcommittee to have this hearing this 
morning in Baltimore so we could maintain ongoing oversight 
over what is taking place.
    Thank you very much.
    Senator Mikulski. Thank you, Senator Sarbanes. I want to 
thank you for being here this morning. I know you had some very 
difficult scheduling situation and rearranged your time to be 
with us, and it is a great joy to work with such an able 
colleague.
    We are really honored this morning that Mayor O'Malley 
could join us. Mayor, we welcome you to the table for any 
comments that you wish to make. We congratulate you on your 
effort to cut all of the rates that bring a city down, whether 
it is the homicide rate or the trash rate. This is another way 
of going after the trash, the flippers, the predatory lenders.
STATEMENT OF HON. MARTIN O'MALLEY, MAYOR, BALTIMORE, 
            MARYLAND
    Mayor O'Malley. Absolutely. Thank you, Senator. Thank you, 
Senators. On any moment's notice, whenever the two of you want 
to come here and give us $5 million, I will always rearrange my 
schedule to be here. So let me say that right up front.
    Senator Sarbanes. We do not want to overly intrude into 
your schedule.
    Mayor O'Malley. It is never an intrusion. In fact, what are 
you doing this afternoon? I can--
    But in all seriousness, on behalf of all of the neighbors, 
all of the neighborhoods, who have been victimized by flipping, 
I sincerely want to thank you for your advocacy, for your 
oversight, for your interest in this, and for your persistence 
on this tough issue. This is not something that lends itself to 
a quick and easy fix.
    But the $5 million that you are able to produce for 
Baltimore is going to go a long way toward helping us repair 
neighbors and repair neighborhoods.
    I want to thank you for letting me say just a couple of 
words. Mr. Graziano, as you know, will be following me, but I 
want to just touch briefly about this problem. You have already 
mentioned the way it destroys dreams, devastates neighborhoods, 
and cripples communities. I want to thank both Senator Mikulski 
and Senator Sarbanes for being national leaders, really 
national leaders on this problem.
    Baltimore is not the only city that has been victimized by 
this. This is a national problem that affects a great many 
cities. Because of your leadership, Baltimore is at the 
forefront of solving this national problem. I would submit to 
you and our guests who are here from HUD that there is no 
better place to start than Baltimore, especially at this time.
    Neighborhoods throughout our city are really teetering, 
many neighborhoods are teetering between stability and decline, 
and it is because they have been pushed to that tipping point, 
and some would argue into a free fall, by the scam artists who 
defraud home buyers, a lot of time first-time home buyers, a 
lot of time single moms who are first-time home buyers.
    For the last year we have ramped up our education and our 
public relations campaign, our awareness campaign, to warn 
consumers, to warn buyers, to toughen up our own rules, so that 
when we have opportunities to take a look at these prospective 
sales through the SELT program and other things, that we are 
very aware, that we are very watchful and that we get right 
involved in the front end now wherever the city has an 
opportunity.
    But despite these efforts, despite the public education and 
the prevention efforts that we have taken, flipping continues, 
with several thousand such deals every year. I think we have to 
continue to work towards making sure that every new homeowner 
is an educated homeowner. We have to continue, through 
aggressive prosecution, to throw the book at flippers.
    But our efforts have to be really focused in two ways. Yes, 
we have to focus on prevention, but not only on identifying the 
means of prevention. We also have to focus on repairing the 
damage that has already been done, on repairing the damage that 
has already been done, not just because it is the just and fair 
and right thing to do, not just because it is the compassionate 
thing to do, but because from a public policy perspective it is 
the most cost-effective thing to do.
    We spend a lot of money at the State level and the Federal 
level investing in programs to strengthen neighborhoods, trying 
to help people own part of the American dream, getting people 
invested in cities, getting people invested in their own home, 
so that they can make a better way for their families and have 
an ownership in this great experiment called the United States 
of America.
    But we need to address the damage that has already been 
done. Without creating red tape, without creating self-
defeating Catch-22's, we have to, and without making home 
ownership more difficult, we have to find ways the put the 
brakes into the system to stop flipping before the money 
changes hands, to prevent government entities from becoming 
unintentionally complicit in flipping.
    In order to do this, I think there is two things that you 
have to have on the ground. You have to have the capacity and 
you have to have the climate. In Baltimore we have both the 
capacity and the climate.
    Commissioner Graziano will speak with you about our strong 
community groups, advocacy groups, non-profits who are working 
to address this travesty already in our city. With your 
leadership, we are hopeful that the Department of Housing and 
Urban Development will use Baltimore as a national laboratory 
to develop cost-effective strategies to prevent flipping.
    We are not the only city where this is happening, as I 
said. This is a national problem. But it is far more cost-
effective to fix it now, before the houses totally deteriorate. 
It is far more effective to get these home owners into homes 
that they can afford to keep up. It is far more effective 
simply from a cost standpoint to fix this now, to prevent it 
for the future, than it is to let it linger while we scratch 
our heads and chase our tail.
    The second thing that is necessary in addition to the 
capacity, which I mentioned we have here, is the climate. This 
is the right time to do this in Baltimore. Baltimore currently, 
according not to the braggadocious Mayor, but the National 
Association of Realtors, has the hottest residential real 
estate market in the country. Home sales in Baltimore are way 
up compared to what they were last year. In January I think 
they were up 61 percent, and this is across the board.
    There are literally bidding wars going on in many of 
Baltimore's strongest neighborhoods for homes, because people 
have confidence. They know what happens to a great American 
city with the assets like ours has when the people come 
together and resolve to reduce violent crime and make their 
city a more livable place. Our students' test scores are 
improving now at a faster rate than in any other jurisdiction 
in the State and last year--key determiner for whether or not a 
person lives in the city is where the person works--we created 
more jobs than we lost for the first time in 11 years last 
year.
    So this is the right time to make this cost-effective 
investment in turning the tide against flipping. Our housing 
market is there, the job market is there. Baltimore is on the 
rise.
    I want to thank both of you for your leadership on behalf 
of the people of this city, on behalf of the victims of 
flipping and the neighborhoods that have fallen victim. I want 
to encourage you to keep going, and I will have a reliable 
partner in Paul Graziano and myself and the City Council and 
the local government officials here in the city of Baltimore.
    Thank you.
    Senator Sarbanes. Good.
    Senator Mikulski. Thank you very much, Mr. Mayor. We want 
to let you get back to running the city. You are right, we want 
to do two things: stop the flipping; and we also want to 
restore the neighborhoods with these vacant FHA houses. We see 
Baltimore as the laboratory to help solve the very big national 
problems.
    But we thank you for your continued advocacy for our city, 
and we will be working with your team.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Mayor.
    Mayor O'Malley. Thank you, Senators.
    Senator Mikulski. We now move to one of two panels we have. 
Our first panel is comprised of the advocacy groups who brought 
this problem to our attention and citizens who experienced both 
flipping and the attempts to restore the situation. So we would 
like to call: Mr. Vinnie Quayle of St. Ambrose Housing; Mr. Ken 
Strong, formerly of SECO, now of the Community Law Center; and 
then two citizens who have had to endure this despicable 
situation: Mr. Harry Smith and Ms. Chassie Adams, who was with 
us last year and we actually toured her home.
    Well, good morning. We want to welcome you once again to 
appearing before our committee.
    We would like to first hear from the citizens. Mr. Smith, 
we would like you to lead off, and then, Ms. Adams, if you 
would follow. If you could just tell us your name and your 
community and your story about what happened to you, how you 
got into being targeted by a predatory lender and what has 
happened to you since. Mr. Smith, please proceed, sir.
STATEMENT OF HARRY SMITH, CITIZEN
    Mr. Smith. Thank you. Good morning, Senators. Senator 
Sarbanes, Senator Mikulski, thank you for having me.
    My name is Harry Smith. I am a 53 year old single African 
American proud father of two sons. In 1996 after my separation, 
I heard about over a radio station, Heaven 600, about a program 
where I could get a home for me and my sons, my two sons, 
through Lucky Realty.
    I called them up. I made an application. I was brought in, 
put through the process, and we were taken over to a vacant 
house that was under renovation several times. It was a 
situation where we had to move from where we were to another 
situation. During that time we were taken several times as the 
house was progressing through the renovation process.
    Finally, we were brought in, the house was finished, and I 
sat down and I signed a number of documents, a contract that I 
was the homeowner of this particular piece of property. My sons 
and I, we moved in in September of 1996. At that time I was 
working and I had to take on a part-time job to make sure that 
all the bills would be paid, including my mortgage. That was a 
flexible mortgage that seemed to just keep flexing, if you know 
what I mean.
    As the years went by, it became increasingly difficult to 
maintain my property. At that time, sometimes I would talk to 
the neighbors in the community and they would tell me--we would 
talk, as neighbors do--Mr. Smith, you have a real nice home and 
I moved here 20 years ago and my house was like $27,000, 
$30,000. And I had to bite my tongue, because I told them our 
house cost me $70,000. As people would move out of the 
neighborhood, they would sell their homes for maybe $35,000 or 
$40,000, at the same time I was still at $70,000.
    As the years went by, it became increasingly difficult to 
maintain the property. A case in point: In this past January I 
was downsized on my job. As I sit here today, my house is in 
foreclosure because I have been unable to make any more 
payments on my mortgage since then. My sons, my two sons and 
myself, are in a situation where we will be homeless unless we 
can get some type of remedy.
    Basically, that is my story.
    Senator Mikulski. It is a very compelling story.
    Ms. Adams, will you please proceed.
STATEMENT OF CHASSIE ADAMS, CITIZEN
    Ms. Adams. Good morning. My name is Chassie Adams and how I 
came to be in this situation is I heard through friends about 
they having homes where you only have to put down a certain 
amount of money and you could become a homeowner. I decided to 
look into it because at the time I really had not decided to 
buy a home, but I was going to check it out anyway because it 
was something that I always wanted.
    So a man by the name of Mr. Beeman, he came to my home and 
discussed with me about this. He told me all, everything, my 
bills and everything, I did not have to worry about nothing 
like that. So after talking to him, he convinced me that I had 
no problem in getting this home. So I decided to go ahead and 
go through with this.
    He took me around and I looked at a lot of different 
places, and I decided on 610 North Robinson Street. So he told 
me it would be ready at a certain length of time. He called me 
and he told me that it was time for me to go to my closing. I 
went to Owings Mills for my closing. At the time, he waited 
until like about a half an hour before my closing to take me to 
this home, to look at it, go through it, and make sure that 
everything was in working order. So I only had like a half an 
hour to do this.
    I went and signed my papers. After I signed my papers, my 
mortgage was $650 per month. I started out paying this. I paid 
it up until the problem with this lady who had her house, it 
was knocked down or something, and she discovered that there 
was a problem with Mr. Beeman and all the homes that he had 
sold. Then we got into all this litigation and everything, and 
that is when the lawyer had told us that we needed to stop 
making payments and do all this, and that is what I did, okay.
    Then last year we went through this with you, Senator 
Mikulski and Senator Sarbanes. They had promised that we were 
supposed to get some satisfaction. I have not had any so far. I 
have been told to go to closing about three times and every 
time we get near closing they give me a call and tell me 
something else is wrong.
    Senator Mikulski. Closing on what?
    Ms. Adams. On my home. They are supposed to have reduced 
the mortgage, and to go through a whole new closing all over 
again. I am also supposed to have had my repairs done on my 
home. Nothing has been done.
    I have been--my water, hot water tank, has broken. I have 
not had a hot water tank in my home for over a year. My roof is 
leaking. The ceiling in my upstairs back bedroom is falling in. 
My porch steps, everything is just--I have just got so many 
repairs that need to be done.
    My furnace was out. I did not have heat. I had to use 
electrical heaters to heat. I did, back a few months ago, I 
called in and out of my own pocket I had to have them come in 
and do some work on my furnace.
    So at this point that is where I am. I do not really know 
where I am, that is the point of it.
    Senator Mikulski. So you are no better off?
    Ms. Adams. No.
    Senator Mikulski. We will come back to have a larger 
discussion. Mr. Quayle, do you want to take it from there.
STATEMENT OF VINCENT QUAYLE, ST. AMBROSE HOUSING AID 
            CENTER
ACCOMPANIED BY FRANK FISHER

    Mr. Quayle. Senator, I would also like to have Frank Fisher 
to come up. I cleared this with Paul. Frank is the person in my 
office who has been talking to hundreds and hundreds of victims 
that have been coming in, I knew you would want to hear.
    Senator Mikulski. Sure, absolutely. Can he pull up a chair 
and sit next to you?
    Mr. Quayle. Bring your chair up, Frank.
    Senator Mikulski. Pull up a chair next to Ken. Could we 
move a chair next to Mr. Strong, please.
    Mr. Quayle. I'm going to be very brief.
    Senator Mikulski. Mr. Fisher, you are going to be in front 
of Channel 13, please.
    Mr. Fisher. I would just as soon get my picture taken any 
place.
    Senator Mikulski. Could you go ahead, Mr. Quayle.
    Mr. Quayle. I am going to be very brief, but I want to talk 
to this single piece of paper that you have in front of you. I 
want to make sure you have this. It has got some statistics in 
the middle of it. Are you with me?
    Senator Mikulski. We are with you.
    Mr. Quayle. I am not going to talk to the first point, what 
have we learned. I think we all know what we have learned.
    Senator Mikulski. I would like you to go over it for the 
record, please.
    Mr. Quayle. What we have learned, okay. Well, first of all, 
we were working very closely with the Baltimore task force and 
HUD up until shortly before the election. Things began to fall 
apart around that time. While we were working successfully, HUD 
tried some dramatic steps. They tried to get the lenders to 
reduce the mortgages on these high-cost loans, these 
overinflated loans. But the lenders' attorneys challenged them 
and said, you have no authority to do this, and the lenders 
refused to cooperate.
    HUD then, in trying to get some control over the numbers of 
this, they tried to set parameters and limit the number of 
eligible clients who could come in for assistance. That is when 
you two Senators and your offices got back involved in this and 
went to see Secretary Martinez and the parameters were dropped, 
and we have opened it back up to anyone who is legitimately a 
victim of this can come forward and try to get some relief.
    We feel we are very much back on track with HUD. This 
Laurie Maggiano, I have met with her a number of times. She 
seems to be wonderful. She is willing to look outside the box 
and try to come up with some real creative ideas on this.
    The hardest thing, the point I wanted Frank to address, 
is--and maybe he should do it right now--the clients that are 
coming to us are very difficult to work with in terms of 
solving their problem. These are people who should not have 
bought the home in the first place, many of whom then have been 
put into bankruptcy by another group of scammers, attorneys who 
just sit down there at the foreclosure circuit court office and 
go out and for $1,300 put families in bankruptcy to stall the 
foreclosure.
    Frank, if you could just say a couple of words about the 
families who are coming and why it is so hard to try to help 
them.
    Mr. Fisher. Well, in the old days when people bought a 
house when we first started St. Ambrose, people would come to 
us and say: Can we buy a house? And we would tell them: Yeah, 
you cannot buy it yet; you have got to do A, B, and C; maybe 
next year you can do it; get $500 together, do this. We had 
prepurchase counseling.
    That seems to have disappeared. Now people go on without 
having really got ready to purchase. As a result, you get a 
buyer who is on the brink at purchase time, not after purchase, 
but at purchase time. It is a marginal thing to begin with.
    Then the house for some reason or other or the buyer or 
whatever happens to marginal people, they lose their job, they 
bought something that is too expensive, their credit has been 
bad. They get into foreclosure and the house--they come to St. 
Ambrose for default counseling.
    Almost always we can do nothing. If it is an FHA loan, we 
have a ballpark chance of doing something. At least there are 
some programs with the FHA. We have to know, too, besides the 
FHA there is--of the 5,000 foreclosures last year, petitions to 
foreclose, about 1,000 of them were for people, homeowners, who 
refinanced their house. That is, the term ``flipping'' really 
started there, where you own a house, refinance it, refinance 
it again, refinance it again, refinance it again.
    I did a study of 36 loans and only 2 of them, in 
foreclosure, only 2 of those people had refinanced only once, 
some as many as 7 times, some as many as 5 times, some as many 
as 3 times.
    Anyway, these folks come in and they are very difficult to 
help. The house goes to foreclosure and they keep calling us 
and saying: We cannot find a place to go. Out of the 5,000 
petitions to foreclose, probably, if we forget about the 
investors--there are about 1,200 investors who lost--1,200 of 
those houses were investor houses that went to foreclosure. But 
of the other ones, people were renting previous to buying this 
house. They had a place to live. They did not like it, 
apparently, so they tried to buy something better.
    They ended up with something worse, because it is extremely 
difficult to purchase--I mean, to rent another property after 
foreclosure. Fortunately, HUD is coming through with relocation 
money and that is a big help. It allows the family to give a 
double security deposit or sometimes even a triple security 
deposit. But without that, I do not know.
    I think the biggest problem right now is what are we going 
to do with all these folks who have lost their house? Where are 
we going to move them? They are going into the basement of ma's 
house, they are doubling up. It is tough. It is a terrible 
situation. I do not know. That is the only thing I can say.
    Mr. Quayle. Thanks, Frank.
    That is--it is almost an impossible situation that I am 
putting my counselors in here when these folks cannot even find 
rentals. But that is the reality of it.
    I would like to go over the statistics in the middle of the 
page there, because I really think this presents the issue as 
it is. What we did at St. Ambrose, we did a study of every 
petition to foreclose for calendar year 2000. A year ago when 
we met, I said, let us find out what is going on in this town, 
let us look at every family who goes into foreclosure this year 
and see what we can find.
    So that sale to homeowners, we are not talking--this is not 
a big city. We are not talking about tens of thousands of 
sales. We only had 8,400 sales, homeowner sales, last year in 
Baltimore. I put that down just to put it in perspective, and 
it is up a little from 1996. The Mayor commented on that. Maybe 
that is a good sign.
    The next line item is the frightening one. The number of 
foreclosures that were initiated in the year 2000 were 5,197. 
That is what we had the moratorium. If you remember, we had an 
FHA moratorium for the whole city for 3 months, and then we had 
another 3 months in 5 selected zip codes, very hot, busy zip 
codes. So we probably would have had close to 6,000 loans going 
to foreclosure had it not been for the moratorium.
    All of this has happened in the last 4 years. Back in 1996 
and prior, 1,900 was your typical number of loans that went bad 
in a given year. Now last year we are up to 6,000 and we expect 
at least 5,000 this year from the few months.
    But the more frightening thing is the FHA-insured loans. If 
you look in calendar 2000, FHA insured 3,100 loans in the city. 
That is 37 percent of the market share. Nationally, FHA 
controls about 30 percent, but we are an FHA town. We have 
always been an FHA town, so we have a higher percentage of our 
people using FHA.
    While those 3,100 loans were being originated, the number 
of FHA loan foreclosures initiated were 1,453. If you just look 
at the 3,100--and I am not saying the 3,100 went into 
foreclosure, although many of them did. Many of the loans going 
into foreclosure in this town are going in in the first year, 
which is something new.
    Senator Sarbanes, Matt Franklin, I am not sure he is with 
HUD any more, but I remember last year you had a hearing and 
Matt came and when we began to hit him with some of these 
frightening statistics he said: Wait a second; we have a 3 
percent default rate nationwide in FHA--which is true. I am not 
denying that. But that was his--that was where he was coming 
from, 3 percent. The industry itself, if the default rate goes 
from .4 of 1 percent to .5 percent it is on the first page of 
the Wall Street Journal. It is a national crisis.
    In this town we are seeing as many as 40 percent of these 
FHA loans over the last 4 years go to foreclosure, 40 percent. 
It is absolutely incredible. The reason I put the 8,400 up on 
top is because the numbers of foreclosures are beginning to 
approach the number of loans in our city.
    Then the last item is the number of houses that HUD 
actually took back, these vacants that are sitting out there in 
the neighborhoods. That has doubled again from 1996 to 2000. 
Last year, 1999, it was 850 as well, or close to it, and we 
expect this to continue because the bad loans are in the 
pipeline. They are going to be in the pipeline at least for the 
next 3 or 4 years.
    I know you want to ask me, are we still making bad loans. 
We cannot prove it. FHA and HUD are trying electronically to 
prevent future bad loans, especially the flips. They are 
starting to catch the flips. But our gut instinct at St. 
Ambrose is that we are continuing to make bad loans, and by 
that I mean loans to people who really cannot afford to make 
that loan work.
    I just have two suggestions on where do we want to go from 
here. I know you want to get to that. I personally, I have been 
at it 33 years. We have got to restore HUD's oversight. We have 
got to do something extraordinary in Baltimore because the 
situation is extraordinary. I put down the suggestion and it 
sounds facetious, but it is almost as if I think we should have 
a couple of FHA employees who call the buyers up as they are 
applying for their loan and say: Let me ask you a couple of 
questions; are you really putting $500 down or $1,000 down? Is 
your grandmother really going to live in the house with you? Is 
this income really your true income?
    Because that is what it looks like when FHA gets the 
paperwork, but that is not what the people tell us when they 
come to our office. They tell us that the real estate agent 
told them to put the grandmother on the deed and say that she 
was going to live in the house. So I really almost think we 
need to be talking as part of the oversight, HUD's oversight, 
to the future homebuyers.
    The second big issue is the failure--and we all know this 
and it is the hardest thing because as policy FHA does not want 
to do this, but, unlike VA that does it--when the house becomes 
a failure, we need to do something to correct that wrong. We 
really--what I suggest is I really think we need to develop a 
system where that house is renovated, truly renovated so it is 
in excellent shape, and then use the real estate board, use the 
private people as much as possible, to market it and sell it to 
a homeowner.
    To let it go in lousy shape to an investor who is going to 
slap some paint on it is the beginning, the first sign of a 
neighborhood's deterioration.
    I have got to tell you, this dollar house program is 
wonderful. We bought 63 houses since last October. We have 
completed ten of them and sold all ten immediately. The real 
estate industry has lists of our houses. They know we are 
repairing them to the best house in the market. The 
neighborhoods, Bel Air-Edison is calling me saying: Vinnie, I 
cannot believe how beautiful these homes are. The neighbors are 
telling us.
    This is exactly what should be done with the FHA houses. 
That is the confidence the neighborhood should have in FHA and 
did have in FHA when I started in the sixties and seventies. 
That was the way FHA operated.
    Anyway, thank you very much. I am sorry, I did not mean to 
go this long.
    Senator Sarbanes. No, no, no. Very good.
    Senator Mikulski. Thank you very much.
STATEMENT OF KENNETH STRONG, DIRECTOR OF RESEARCH AND 
            POLICY, COMMUNITY LAW CENTER, BALTIMORE, 
            MARYLAND
    Mr. Strong. Thank you, Senators. My name is Ken Strong. I 
am the Director of Research and Policy for the Community Law 
Center in Baltimore. For the past 6 months I have also served 
as a consultant to the Baltimore City Department of Housing, 
coordinating Baltimore's flipping and predatory lending task 
force.
    You called the hearing this morning to learn where we stand 
on the issues of mortgage scams, flipping schemes, and 
predatory lending, abuses of the FHA and HUD's inventory of 
vacant houses in Baltimore. Many of us in government and the 
community have worked hard to prevent illegal and unethical 
real estate practices and to respond to the damage done already 
to families and to neighborhoods. You will hear about that 
today.
    But the bottom line, Senators, is that we are not winning 
the war. Property flipping, according to my research, has not 
decreased. Its character has changed somewhat. There are more 
investor schemes now than bilking of first-time homeowners, but 
there is still a lot of that. But it has not decreased. New 
flippers have replaced old flippers.
    Even with all the publicity, all the investigations and 
people going to jail, all the consumer education efforts, all 
the counseling, there are still too many people trying to make 
a fast buck in Baltimore's housing market, whether illegally or 
unethically, and too many witless and hapless buyers, both 
investors and homeowners.
    The resources that we have brought to bear on the problems 
are inadequate to the need. In terms of the National Task Force 
on Predatory Lending that you helped get started with the 
previous HUD Secretary, there are reams of reports from around 
the country that we are not alone in this problem, but that 
Baltimore has experienced some of the worst of it. In terms of 
the local task force that has been meeting every 3 weeks over 
the past year with good participation from community groups and 
government and HUD, the full report of where we have come with 
that task force and the fact that we have worked hard is 
contained in the attachment to my testimony on the progress 
report and I will not reiterate that.
    But I do want to emphasize the criminal investigations and 
prosecutions. We have had nearly three dozen individuals 
prosecuted, indicted, and charged with crimes by Federal 
authorities. The Attorney General's office is also undertaking 
cases. The FBI and the U.S. Attorney's office and other Federal 
agencies have done, Senators, exactly what you told them and 
asked them to do. They are going after fraudulent actors in the 
buying and selling of Baltimore with a vengeance.
    Special Agent Jim Costigan of the FBI and Assistant U.S. 
Attorney Joe Evans deserve some special recognition for their 
work. There is some positive sign that it is having an effect. 
A group of investors and developers met recently with me and 
with city housing officials. They were complaining that it is 
harder to buy and sell properties quickly in Baltimore now and 
that appraisers have become more cautious and lenders more 
skeptical. Thank goodness.
    I recommend that Federal authorities keep that pressure on 
and even increase their efforts, because it does have a 
positive effect. It does chill some of the people who are 
trying to make those fast bucks. Illegal flippers and mortgage 
scam artists have to know that there is a risk of jail time at 
the end of their real estate joy ride.
    One of the major frustrations in working with HUD to help 
families victimized in mortgage scams--that has been one of the 
major frustrations. Vinnie Quayle and Frank Fisher have 
addressed that.
    The point I want to make was that the task force in 
Baltimore had hoped to have the FHA fraud prevention and victim 
assistance program already in gear, running smoothly, so that 
we could turn our attention to investor schemes and predatory 
refinancing of mortgages, equity stripping of seniors and 
people who have invested in their homes over time. We still 
want to pursue those issues with HUD and with the Baltimore 
Housing Department as our partners. Hopefully, with the 
turnaround that we have been seeing lately, with the creative 
problem-solving on the FHA part of the problem, we can begin to 
do that.
    Senator Mikulski, last year after our hearing on March 27th 
you joined me and Congressman Cardin and we walked through the 
600 block of North Robinson Street. We visited families sold 
houses for upwards of $80,000. We saw the cosmetic repairs 
inside some of these homes. We saw a vacant HUD house and other 
vacancies on the block, magnets for trash and rats. And we met 
good, honest, hardworking homeowners and tenants trying to 
maintain their dignity and raise their families in spite of the 
real estate mayhem all around them.
    Figuratively speaking, I want to take you back to that 
block today and it is not a pretty picture. Some of the 
pictures--and I will leave them up on the easel and we can look 
at them later in the hearing--tell, as pictures do, a lot more 
than words can at times.
    A year ago there was one HUD house on that block. Now there 
are three. The vacant and dilapidated house at 600 North 
Robinson Street that Robert Beeman sold to somebody for $85,000 
is still vacant and now more dilapidated. I believe the 
criminal information has recently been filed by the U.S. 
Attorney's office against some sellers who were getting FHA 
mortgages arranged and selling houses for over $50,000. One of 
those buyers was banned by FHA. One of the houses that he sold 
on that block has gone into foreclosure. The other house, I 
think the homeowner is struggling to pay an inflated mortgage 
and should not have to do that.
    I question whether any of the houses on this block are 
worth more than $50,000. There is no question at all that none 
of the houses were ever worth $80,000 plus.
    There are two new bank foreclosures on the block. A 
company, Milton Robinson LLC, owned 605 North Robinson Street--
we have a picture of it--last year, after acquiring the 
property for $17,500. Brent Reed bought it from the company for 
$47,000 and on the same day flipped it to Andrew Bogdan in a 
sale recorded the same day for $64,000. Mr. Bogdan has the 
distinction of being the number one person with foreclosure 
petitions in the year 2000. Forty nine of his properties have 
been filed for foreclosure.
    It has been announced by the U.S. Attorney's office that a 
criminal information has been filed against Mr. Bogdan. But the 
aftereffects of what he has done is continuing on this block.
    Right next door to 605 is 607, and it was bought by 
Cadillac properties recently for $13,000. I fear that house 
could be a candidate for the flipping and the scams and the 
continued deterioration of the block. The reason I fear that is 
that Milton Robinson LLC and Cadillac Properties are owned by 
the same individual. The principal in both of them is William 
W. Wright and the resident agent is the same person.
    We have so much work to do to step this tide. I want to go 
back to the HUD houses for a minute, because we hope that they 
will be bought by homeowners and owner occupants. It seems that 
the one last year did. But the chances are in this neighborhood 
that the properties will languish and eventually be sold to an 
investor who may flip the property and continue the cycle of 
deterioration.
    We have provided HUD with a list of former HUD properties 
that have been bought by investors and quickly flipped for 
large profits. They deserve investigation. HUD has recently 
shared with me a list of their most frequent investors and 
buyers of their property.
    One of the big recommendations I want to make to you and to 
HUD is that there be eligibility criteria for people, companies 
and investors who buy property. There is eligibility for so 
much else. You should not be able to buy a HUD house if you 
have a criminal record in real estate or economic crimes. You 
should not be able to buy a HUD house if all you do is leave 
them vacant, waiting for the market to change, or if you have 
housing code violations on your record.
    The purchase of HUD homes ought to be encouraged and made 
easy for real homeowners. The purchase of HUD homes by 
investors and speculators ought to be more difficult, and for 
illegal flippers and scammers it ought to be impossible.
    I was infuriated when it appeared that HUD was reneging on 
its promises to help Baltimoreans afflicted in FHA-insured 
mortgage scams and I know you were. The actions that you took 
then have begun to show progress.
    We are thrilled with the personnel assignments that HUD has 
made to work with us: Laurie Maggiano, Engram Lloyd, excellent 
people working hard. We have to avoid the bureaucratic 
tendencies in the bureaucracy they work within, that this is 
not a short crisis solved quickly and move on to the next 
crisis. This is a long-term problem. It arose over years. We 
need to work through it and put the resources that are 
necessary to deal with this into Baltimore and turn it around.
    I have enclosed in my testimony a letter from the Finney 
family, who has been waiting for more than a year to find out 
if HUD is going to help them with their problem. All they want 
is a fair mortgage at a fair appraised value of the house. They 
are still waiting. I believe they are in the audience today. 
Hopefully, they will not have to wait much longer.
    I am so glad that Ms. Chassie Adams has joined us this 
morning and that you heard her story. We are hoping that Ms. 
Adams may be one of the lucky ones because she had a good 
lawyer, Andre Weitzman, she has had a good housing counselor, 
Carl Cleary in Southeast Baltimore. We have gotten a 
cooperative lender to consider a rewritten mortgage in her 
situation and the Abell Foundation to consider guaranteeing the 
loan part for repairs on her house.
    We are not out of the woods yet. That has not settled yet. 
Ms. Adams is still suffering. But we hope that this is the last 
winter that she has to live without a furnace.
    There are some other people who are being helped through 
that system, but not nearly enough. Last Friday night, Senator 
Sarbanes, you joined us at Solid Foundations in its kickoff 
fundraiser, Senator Mikulski is on our honorary committee, to 
try and raise some private funds that are flexible and that can 
provide small grants to people who are in recovery from 
mortgage scam victimization.
    That will help in part, but it does not solve all of the 
problem. We have to regroup and redouble our efforts to work, 
not only with the victims of FHA-insured scams, but also of 
conventional loan scams, and be creative in how we solve that 
problem. Ruth Louie, the Mayor's Coordinator of Community 
Investment, is working with a group of bankers and Fannie Mae 
in trying to think through how we can do that. We do not have 
it solved yet, but we are hoping that we can make some progress 
over the next several months to create a system to help people 
get refinanced and back on their feet.
    Mayor O'Malley talked about neighborhoods that are at risk. 
One of them is Brooklyn, a strong Baltimore neighborhood. We 
need a strong Brooklyn. There are a lot of strengths to that 
community in Baltimore. But there is a pocket within Brooklyn, 
the 800 and 900 blocks of Jack Street and Stoll Street, that 
investors have undermined. We have to pay attention to the 
investor schemes as well.
    So I have made some recommendations in my testimony. I will 
not spell them out. They are pretty straightforward.
    Senator Mikulski. Please, spell them out.
    Mr. Strong. I would be happy to. Number one, we want to 
keep HUD's feet to the fire to follow through on the cases 
already submitted and to be open to the new cases that we are 
just now discovering. People are calling every day to report 
their victimization. So that has to be in place and strong.
    We have to pursue new ideas for increasing the HUD sale of 
HUD's inventory to actual homeowners, to keep the speculators 
and investors out.
    We have to seek substantial Federal support to help 
Baltimore City deal with the vacant house crisis that is left 
in the wake of this bad business. We deeply appreciate the 
Federal support announced today and that we have been working 
to use, but it does not match the need. We need to really look 
at what the need is and then seek the support at State and 
Federal levels to really bring the neighborhoods back in 
recovery.
    We have to test out the requirement of prepurchase 
homeownership counseling, exactly what Mr. Fisher described in 
his testimony.


                           prepared statement


    Lastly, we need to look at authorizing HUD and FHA to tap 
the huge funds in the FHA for programs that reduce fraud, 
prevent foreclosure, repair and maintain HUD's inventory, and 
provide for neighborhood recovery.
    I want to thank both of you for the leadership you have had 
on these issues and for your support.
    [The statement follows:]

                Prepared Statement of Kenneth J. Strong

    Good morning. My name is Kenneth J. Strong, I am the Director of 
Research and Policy for the Community Law Center in Baltimore, 
Maryland. For the past 6 months I have also served as a consultant to 
the Baltimore City Department of Housing and Community Development 
coordinating Baltimore's flipping and predatory lending task force. On 
March 27, a year and 6 weeks ago, I testified before this committee in 
my capacity then as the Director of SECO (South East Community 
Organization) and as a founder of the Coalition to End Predatory Real 
Estate Practices.
    You have called this hearing to learn where we stand on the issues 
of mortgage scams, flipping schemes, predatory lending, foreclosures, 
abuses of the FHA, and HUD's inventory of vacant houses in Baltimore. 
Many of us in government and in the community have worked hard to 
prevent illegal and unethical real estate practices--and to respond to 
the damage done already to families and to neighborhoods--you will hear 
about that today. But the bottom line, Senator, is that we are not 
winning this war. Property flipping, according to my research has not 
decreased, it's character has somewhat changed, but it hasn't 
decreased. New flippers have replaced old flippers. Even with all the 
publicity, all the investigations and people going to jail, all the 
consumer education efforts, all the counseling--there are still too 
many people trying to make a fast buck in Baltimore's housing market, 
whether illegally or unethically, and too many witless or hapless 
buyers, both investors and home owners. The resources we have brought 
to bear on the problems are inadequate to the need.
    As a direct result of your hearing last year, a National Task Force 
on Predatory Lending was formed and a Baltimore Task Force on Flipping 
and Predatory Lending. Both groups had excellent participation from 
government, community, and the private sector. Early on, it was 
determined that Baltimore would serve as a national laboratory for the 
understanding of these issues and the testing of solutions. We 
documented the dramatic increase in foreclosures in Baltimore and four 
other cities--New York, Chicago, Atlanta, and Los Angeles--and their 
relationship to subprime lending. In the 1990s the subprime lending 
market, lending at higher rates of interest to borrowers with imperfect 
credit, exploded.
    In Baltimore, the number of subprime refinance loans increased over 
tenfold between 1993 an 1998. These loans were seven times more likely 
in low-income neighborhoods, six times more likely in predominantly 
African-American neighborhoods, and four times more likely in middle 
class African-American neighborhoods. Subprime loans had a 
disproportionate share of the foreclosures in Baltimore's low-income 
and African-American neighborhoods. They resulted in foreclosures more 
rapidly than prime or FHA loans. The mean lag time between origination 
and foreclosure petition filing was less than 2 years in the subprime 
category. These findings related to subprime lending were consistent 
with disturbing national trends. Even more disturbing were the accounts 
of families abused by predatory lending practices within that market. 
Excessively high interest rates and fees, severe pre-payment penalties, 
the deceptive sale of credit life insurance financed into the mortgage, 
balloon payments, negative amortization, aggressive refinancing and 
equity stripping are the kinds of practices that turned a large part of 
the subprime market into what we call predatory.
    In addition to our fair share of the national problem of predatory 
lending, Baltimore also experienced, and still experiences, an unfair 
share of mortgage scams and flipping schemes in the conventional 
mortgage market and loans insured by FHA. Baltimore has had the highest 
per capita rates of FHA defaults, foreclosures, and vacant house in the 
HUD inventory. These problems are exacerbated by neighborhood 
concentrations of the flipping and mortgage scam problem. The 
neighborhoods of Patterson Park, Belair-Edison, Waverley, Govans, and 
Southwest Baltimore--neighborhoods where racial change is taking 
place--have been especially hard hit. Last year I showed you maps that 
graphically demonstrated the problems with hundreds of pins. More 
recently, I have studied the real estate transactions in Baltimore 
between 6/1/99 and 11/15/00, roughly an 18 month period. I identified 
over 1,800 properties that were bought and sold quickly for 
suspiciously high profits in neighborhoods where the sales prices 
seemed over-valued. In more than a thousand of those transactions, the 
purchase and the sale were recorded on the same day, leaving no excuse 
that rehabilitation or market changes could account for the profit 
margins.
    A great deal, though not all, of the property flipping in Baltimore 
is illegal. Nearly three dozen individuals have been prosecuted, 
indicted, or charged with crimes by Federal authorities. The Attorney 
General's Office is undertaking additional cases through its criminal 
and consumer protection divisions. Last year, you called on the FBI, 
the U.S. Attorney's Office and other Federal agencies to do exactly 
what they are doing--going after the fraudulent actors in the buying 
and selling of Baltimore with a vengeance. Special agent James Costigan 
of the FBI and Assistant U.S. Attorney Joe Evans deserve special 
recognition for their work. The investigations and prosecutions are 
having some of the effect we want. A group of investors and developers 
met recently with me and with city housing officials. They were 
complaining that is harder to buy and sell properties quickly in 
Baltimore--appraisers have become more cautious and lenders more 
skeptical. Thank goodness. I recommend that Federal authorities 
maintain and increase their efforts. Law enforcement cannot solve our 
broader problems in Baltimore's housing market, they can't touch the 
unethical but not illegal activities, but they are a critical part of 
the solution. Illegal flippers and mortgage scam artists have to know 
there is a risk of jail time at the end of their real estate joy ride.
    In addition to playing our part in the National Task Force on 
Predatory Lending and supporting law enforcement, the Baltimore Task 
Force and its members have been active on several fronts. We have 
encouraged civil law actions on behalf of home owners and 
neighborhoods. One of our members, Civil Justice Inc., recently 
announced a new program, funded by the Abell Foundation, to provide 
legal advice to first time home buyers prior to settlement as an 
antidote to housing fraud. A task force subcommittee developed an urban 
appraiser training course now required for new and renewed licensure. 
How to avoid becoming a party to mortgage scams and flipping schemes is 
part of the course. Ms. Ruth Louie, Mayor O'Malley's community 
investment coordinator, chairs a committee looking at new mortgage 
products that are safe and economical, and ways to refinance victims of 
mortgage scams. Local and national banks are active on her committee. 
We have co-sponsored town hall meetings with Attorney General Joseph 
Curran taking prevention messages and pamphlets on the road. We have 
supported a number of other consumer education efforts that you will 
hear about in other testimony. We are thrilled that HUD is now working 
acorn to expand consumer education at the grass roots level.
    Legislative and regulatory reform efforts have been frustrating. 
The Maryland general assembly has failed two years in a row to pass any 
major bills to curb predatory lending or real estate practices. Last 
year, a comprehensive anti-predatory lending bill died in committee. 
And this year four targeted pieces of legislation--restricting ``yield 
spread'' premiums, banning single premium finance credit life 
insurance, requiring the escrow of taxes and insurance, and mandating 
home ownership counseling for government supported loans--all failed. 
We have not succeeded in getting legislators outside Baltimore city to 
sufficiently appreciate the problems or understand that they threaten 
their constituents as well. We have yet to reach a consensus locally on 
what power the Baltimore city council has to enact anti-predatory 
lending laws or how best to use that power. Nationally we expressed 
support for the Sarbanes-LaFalce legislation but current congressional 
leadership has not moved it forward. At every level of legislative 
initiative--Federal, State, and local--we need to increase our efforts 
to build concensus, to broaden constituencies, to forge bi-
partisanship, and to involve industry in crafting solutions.
    Our other major frustration has been in working with HUD to help 
families victimized in mortgage scam abuses of the FHA program. Vinny 
Quayle will testify more directly about these issues, as will HUD. The 
point I want to make was that the task force had hoped to have the FHA 
fraud prevention and victim assistance programs well underway by now. 
We wanted to move to turn our attention and energy to predatory 
convention loans and refinancing--the other two thirds of Baltimore's 
skyrocketing foreclosure problem. We wanted to pursue the investor 
schemes that degrade neighborhoods and frequently involve mismanaged or 
neglected rental property. We still want to pursue these issues with 
HUD and Baltimore's housing department as our partners. With HUD's 
renewed commitment to creative problem solving on the FHA part of the 
problem, and renewed compassion for the families in FHA-insured housing 
crises, maybe we can.
    Senator Mikulski, last year you and Congressman Cardin walked with 
me through the 600 block of North Robinson Street. we visited families 
sold houses for upwards of $80,000, we saw the cosmetic repairs inside 
some of these houses, we saw a vacant HUD house and other vacancies on 
the block, magnets for trash and rats--and we met good, honest, hard-
working home owners and tenants trying to maintain their dignity and 
raise their families in spite of the real estate mayhem all around 
them. Figuratively speaking, I want to take you back to that block--it 
is not a pretty picture. A year ago there was one HUD house, now there 
are three. The vacant and dilapidated house at 600 North Robinson 
Street that Robert Beeman sold to someone for $85,000 is still vacant 
and now more dilapidated. Each of the three new HUD homes had been sold 
to home buyers for over $50,000; I believe that criminal information 
has recently been filed by the U.S. Attorney's Office against one of 
the sellers; a second seller was banned from doing business with HUD. 
The banned buyer sold another house to someone on this block for over 
$50,000 but it has not gone into foreclosure. The home owner is 
probably struggling to keep up with inflated mortgage payments. HUD 
ought to offer this home owner mortgage reduction assistance if it is 
warranted but they don't have a way of doing that now until after 
default and foreclosure proceedings. I question whether any of the 
houses on this block are worth more than $50,000. There's no question 
at all that none of the houses were ever worth $80,000 plus.
    There are two new bank foreclosures on the block. Milton Robinson 
LLC owned 605 North Robinson Street last year after acquiring the 
property for $17,500. Brent Reed bought the property for $47,000 on 4/
7/00 and flipped it to Andrew Bogdan in a sale recorded the same day 
for $64,000. Mr. Bogdan has the distinction of being the number one 
person with foreclosure petitions in the year 2000; 49 of his 
properties fell into that category. Next door at 607 North Robinson 
Cadillac Properties, Inc. has purchased the property for $13,000. I 
hope this property is not flipped in the same way the one next door was 
but I have reason to fear it might. William W. Wright is, according to 
State records, the resident agent and a principal of both Cadillac 
Properties and Milton Robinson LLC.
    Let's go back to the new HUD houses. We hope that they will be 
bought by owner occupants; it does seem that the one last year did. But 
the chances are in this neighborhood, that the properties will languish 
and eventually be sold to an investor who may flip the property and 
continue the cycle of neighborhood deterioration with a new victim 
buyer or lender. I am providing to HUD today a list of former HUD 
properties that have been bought by investors and quickly flipped for 
large profits. While there is nothing inherently illegal in this, I am 
suggesting that HUD examine and analyze these sales with an eye toward 
preventing fraud. People who HUD knows have abused FHA as sellers 
should not be eligible to buy HUD properties at auction. I would go 
further in recommending that HUD establish eligibility criteria for 
purchasers of HUD properties, particularly investors. You shouldn't be 
able to speculate on HUD houses if you have a criminal record in real 
estate or economic crimes. You shouldn't be able to buy a HUD home if 
you have a record of selling to unqualified buyers and contributing to 
our foreclosure problems. You should be able to buy HUD houses if all 
you do is leave them vacant waiting for market conditions to change in 
your favor. You should not be able to buy them if the city's housing 
department says you have a significant record of housing code 
violations. The purchase of HUD homes by real homeowners ought to be 
encouraged and made easier. The purchase of HUD homes by investors and 
speculators ought to be more difficult. For illegal flippers and 
scammers it ought to be impossible.
    As you know I was infuriated when it appeared that HUD was reneging 
on its promises to help Baltimoreans afflicted in FHA-insured mortgage 
scams. I know you were too. Thanks to your efforts and those of Senator 
Sarbanes, we are seeing signs of progress today. HUD will testify, I am 
sure, about renewed efforts to assist victims. I am cautiously 
optimistic about these efforts. There are no quick fixes to these 
problems, this is why the Baltimore Task Force needs to continue; we 
have a very long way to go to right the wrongs that have been done and 
prevent their recurrence. As I said before we are not yet winning that 
war. But I am pleased with HUD's staff assignments to this work--Engram 
Lloyd from Philadelphia, Laurie Maggiano and Vance Morris from DC are 
working hard. They and we have to be vigilant against bureaucratic 
tendencies to circumscribe and minimize the problem we face, to offer 
gestures and band-aids that don't heal the wounds or prevent injury, to 
move quickly to the next crisis in the next city without learning the 
most we can from the Baltimore experience. And we have to reject the 
tendency to throw up hands and say we don't have the authority or the 
capacity to act. If the agency feels it is unable to act fully to 
address and redress FHA-insured mortgage scam issues, the agency should 
ask for legislative and budgetary help from Congress. I will be more 
than cautiously optimistic when the Finney and the Chriscoe families 
find out whether HUD is going to help them or not. I have enclosed the 
letter from the Finney that they gave to our task force. Larry 
Chriscoe's story was told in the Sunpapers (copy attached). These 
families have been waiting a long time; they should not have to wait 
much longer.
    Let me share some good news with you. Last year you visited Chassie 
Adams at 610 North Robinson Street and Cheryl Hargrove at 625 North 
Robinson Street. Ms. Adams bought her home from Robert Beeman; the 
sales price was $84,000. She had a monthly payment on the first note 
amounting to $650 per month. It was a 13 percent interest loan with an 
infamous balloon payment at the end of fifteen years; Through the 
assistance of her lawyer Andre Weitzman, housing counselor Carl Cleary, 
First Mariner Bank, and the Abell Foundation, Ms. Adams is in the 
process of getting a new mortgage for $27,500 at 7 percent with a 
monthly payment of $345. The new mortgage includes several thousands of 
dollars of repairs to her home. Hopefully the winter of 2000-2001 is 
the last one Ms. Adams will spend without a furnace.
    The story of Ms. Cheryl Hargrove is similar. Her $83,000 
cosmetically repaired house is becoming a $31,300 house with $6,795 of 
real repairs structured into the mortgage and $700 worth Ms. Hargrove 
is paying for herself. Her monthly mortgage payment of $611 is changing 
to $420. Ms. Adams and Ms. Hargrove have a few more hurdles on the road 
to recovery but there is light at the end of the tunnel. Unfortunately 
they are exceptions to the rule. Most people don't have lawyers like 
Mr. Weitzman, housing counselors like Carl Cleary, and cooperative 
local bankers like First Mariner.
    Many mortgage victims, even those on the road to recovery, need a 
helping hand to continue as homeowners. Some families need help in 
transition to safe rental properties. Others need help in preventing 
foreclosures and making homes liveable. Solid Foundations is emerging 
as a private flexible fund to help families with small grants in these 
circumstances. You know about this because you serve as one of our 
honorary committee chairs and you attended our first annual fundraiser 
last Friday night. Solid Foundations was the brainchild of a Baltimore 
businesswoman, Mimi Kapiloff, who read about the plight of at-risk home 
owners and decided to do something about it. Families working with 
housing counseling or non-profit agencies may apply for small grant 
assistance through such organizations. It is an exciting new 
development.
    When we have the HUD/FHA aspects of prevention and victim 
assistance under control and in gear, we do have to invest intensive 
research and resources into the companion issues of investor scams and 
predatory refinancing. The investor scams involving the flipping of 
vacant properties or properties with tenants are not victimless crimes. 
Neighborhoods suffer from the vacancies left in the wake of this bad 
business. Over a thousand foreclosure petitions in 2000 were filed 
against multiple property owners who had invested in get rich quick 
schemes. A great many of these properties have or had tenants who 
suffer from the conditions of these houses and their instability. A 
prime example is an area of Brooklyn, the 800 and 900 blocks of Jack 
Street and Stoll Street. Brooklyn, as you know, is a long-standing 
working class community with a good housing stock and many strengths. 
In this pocket of Brooklyn, where property flipping is concentrated, 
conditions are more like a third world country. The trash, debris, the 
physical environment is appalling. In this area, a number small two 
story brick houses were purchased by an investor for $64,000 each; the 
State Department of Assessment and Taxation considers those values 
inflated. Many are owned by Eugene Manning or his companies; Mr. 
Manning has the distinction of having the second highest number, 41, 
properties petitioned for foreclosure in 2000. So many foreclosures in 
such concentrated areas of south and southwest Baltimore will wreak 
havoc on those neighborhoods, disrupt the lives of tenants, and create 
pockets of real estate rot with negative impacts on all the surrounding 
houses.
    Investor schemes are a growing part of Baltimore's flipping 
problem. Mr. Russ Whitney advertised on cable TV last week that he is 
hosting a series of free seminars in Baltimore starting tomorrow on how 
to build wealth. One of his strategies is flipping properties. He said 
he would teach how to buy HUD houses cheaply, make modest repairs, and 
sell them quickly for large profits. He said he would teach how to get 
government grants and first time home buyer incentives on the way to 
building wealth. Mr. Whitney says he started with $1,000 and after 18 
months had over $4,000,000. Apparently he wants to share these secrets 
of success with me and you and everyone else. He is not the only person 
selling the snake oil of getting rich quick in urban real estate, there 
are real estate investment clubs that meet monthly in Baltimore and a 
website www.flippinghomes.com.
    The arena of predatory refinancing is best appreciated by looking 
at the vulnerability of senior citizens, many of whom have equity built 
up over decades or who own their homes outright. Congress has received 
substantial testimony that some refinancing companies target seniors to 
loan money for repairs or other needs using their homes as collateral, 
to churn those loans getting the borrower deeper and deeper in debt, 
and then to strip their equity in their homes. Last Monday, the 
Community Law Center and Fannie Mae sponsored a seminar on predatory 
refinancing. AARP provided information after surveying a cross section 
of citizens over 50 years old. They found that 59 percent own their 
homes outright. Eighty six percent of them have seen or heard home 
equity loan ads. Nearly a quarter did not think that they had enough 
money set aside for home repairs and about the same percentage actually 
took out home equity loans. Of those borrowers more than half did not 
talk to more than one lender, they did not shop. More than a quarter 
selected their lender based only on the lender's mailing, phone calls 
or door-to-door solicitations. Many of the lenders who push their 
products on seniors and strip their homes of equity are the same 
lenders who originate or buy subprime mortgages. The subprime lending 
industry, like most industries, will tell you they are over-regulated 
and no new legislation is needed to curb abuses within their industry. 
I couldn't disagree more. I strongly support the Sarbanes-LaFalce 
initiative and all other efforts to better protect consumers, 
especially senior citizens and lower-income families.
    In conclusion, I would like to make the following recommendations:
    Keep HUD's feet to the fire to follow through on the cases already 
submitted for victim assistance in FHA-insured houses. Establish some 
benchmarks for accountability and require progress reports.
    Pursue HUD's new ideas for increasing the sale of HUD's inventory 
to actual home owners, owner-occupants, and decreasingly the sale to 
speculators and investors.
    Establish eligibility for people and companies who buy multiple 
properties from HUD. Ensure that they are law-biding, honest, 
competent.
    Seek substantial Federal support to help Baltimore City with the 
vacant house crisis, thousands of vacant houses, a problem exacerbated 
by mortgage scams, flipping schemes, and predatory lending.
    Test out the requirement of pre-purchase home ownership counseling 
in a selected area of Baltimore as an antidote to abuses of FHA.
    Authorize HUD and FHA to tap the FHA fund for programs that reduce 
fraud, prevent foreclosure, repair and maintain HUD's inventory, and 
provide neighborhood recovery funds to communities where HUD abuses are 
concentrated.
    In the broadest sense, all of our efforts to address these problems 
need to be redoubled. Law enforcement needs to continue and be 
intensified. Civil law actions need to continue and be multiplied. 
Consumer education must be promoted through all media and in every 
community. Victims' assistance through government and private channels 
has to grow, expand, and become easier. Neighborhood recovery has to be 
revisited and expanded, especially as it relates to vacant housing. 
Legislation and regulatory must be pursued to keep professionals in 
real estate and lending more honest and ethical. The issues we are 
discussing today are not Democratic or Republican, not city or 
suburban. Every part of our society is threatened by the explosion of 
predatory lending practices and the destabilization of neighborhoods.
    Thank you for your leadership on this issue, for your consistency, 
your caring and your strength. It has been an inspiration and a support 
to me.

    Senator Mikulski. Well, thank you very much, Ken, and to 
all of those people who have testified.
    Vinnie, I want to ask you a couple of questions and then go 
to Ken Strong and Ms. Adams, Mr. Smith as well. Let us go to 
your sheet, ``What Is Happening In Neighborhoods.'' Those 8,400 
sales to homeowners were conventional, VA, and other forms.
    Mr. Quayle. And FHA.
    Senator Mikulski. So that is the total mortgages in 
Baltimore City.
    Mr. Quayle. That is right.
    Senator Mikulski. In all of the neighborhoods.
    Mr. Quayle. That is right.
    Senator Mikulski. Then of that, 5,000 foreclosures were 
initiated. Do you mean that only 3,400 mortgages----
    Mr. Quayle. No, the foreclosures are not those 8,400 loans. 
The foreclosures are loans that were made previously.
    Senator Mikulski. Okay, fine. Then FHA-insured loans. Of 
that 8,400, 3,100 were FHA.
    Mr. Quayle. That is correct.
    Senator Mikulski. Then of that 3,100, 46 percent, some in 
the first year, were foreclosed.
    Mr. Quayle. No. That is the same question you asked before. 
While 3,100 FHA loans were being originated in calendar 2000, 
at that same time 1,453 FHA loans made in previous years and in 
2000 as well went bad.
    Senator Mikulski. I got it. But the point is that of all of 
the loans in Baltimore City by FHA, 46 percent last year?
    Mr. Quayle. The last couple of years, and it will be in the 
future, because this is just one year, 2000. A lot more of 
these loans than the 3,100 will go bad in the next few years.
    Senator Mikulski. Well now, let me get to a couple of 
questions with you, and then perhaps Senator Sarbanes would ask 
some questions, and we will go back and forth in rounds.
    Now, let us go to prevention, because you and Frank spoke 
eloquently about this. I am going to throw out something else, 
because what you are talking about is so retail, I am not so 
sure that retail a loan with preventive pre-housing ownership 
counseling is going to be effective. Given the magnitude of 
this, there is just not enough employees in nonprofits, HUD, 
and FHA to be doing this.
    So here is my question. Do you envision that there could be 
more what I will call wholesale advice, for example workshops 
and given President Bush's idea of involving faith-based 
organizations--and there is always the issue of constitutional 
compliance on service. But really, to use both the community 
advocacy groups and faith-based groups for wholesale workshops 
getting people ready for homeownership, I think one person at a 
time is great, but I do not see how we can get to it.
    What do you think about what I am saying and do you think 
we ought to go wholesale, or do you think my intentions are off 
the mark?
    Mr. Quayle. We at St. Ambrose do not have a lot of 
confidence in the education piece. The industry, the real 
estate industry, the banking industry, are all saying what we 
need are more consumer education. In our 30 years we have not 
seen that work.
    Is that right, Frank?
    Mr. Fisher. Yes.
    Mr. Quayle. But I share your concern, because not everyone 
can get pre-purchase counseling. I share that. We do not have 
the counselors, we do not have the quality counselors. But the 
problem is that we have lost HUD's oversight. Once the lenders 
started endorsing the loans themselves, we lost HUD's 
oversight.
    We have got to figure out some way to get some oversight 
back in there.
    Senator Mikulski. So that is the issue.
    Mr. Quayle. That is the issue, yes.
    Senator Mikulski. But I am not so sure random phone calls 
are----
    Mr. Quayle. I know. Maybe if we took the bad lenders, the 
lenders where--this new legislation is coming that is going to 
identify who the lenders are who are making these questionable 
loans----
    Senator Mikulski. But am I correct in saying when there was 
a national policy change that enabled FHA to go directly to the 
lenders, that created the window for the predatory lenders to 
come in?
    Mr. Quayle. Absolutely, absolutely.
    Senator Mikulski. Well, I think it is something to be 
considered, and we look forward to your advice. I know this is 
something that would need to be dealt with in the authorizing.
    Mr. Strong. Senator, could I answer that question just very 
briefly?
    Senator Mikulski. Which question? You mean the wholesale?
    Mr. Strong. The one about the wholesale education, because 
I think it is an important part of the solution. Reaching into 
churches and community groups with real seminars, lengthy 
things, not just ads on TV or hot line numbers to call, but 
real education, is part of the solution and ought to be 
supported. But I do not think it will be a panacea by any means 
for what we are dealing with.
    I think HUD is working now with ACORN to try and do some 
more grassroots education in neighborhoods that have been 
targeted by flippers. That is a good thing.
    Senator Mikulski. Well, I do not know if that answers my 
question. We can always point to individual organizations doing 
individual things. I am talking about a significant government-
organized, not based on volunteers or the kindness of 
strangers, really intervention, with real workbooks and 
resources.
    We have a very robust ministerial community of a variety of 
faith organizations, probably one of the richest nonprofit 
organization towns in America. That is what I was trying to 
consider.
    But let me--I have been asking questions for 5 minutes. I 
am going to turn to my colleague and then, Ken, I will come 
back to your point, and then I am going to talk to Ms. Adams. 
Senator.
    Senator Sarbanes. Thank you very much.
    First, Ken Strong, I was pleased to hear that we may work 
Ms. Adams' situation out here now, that you are hopeful that 
that will come through. Who is going to be left holding--I 
mean, the sales price on her home was $84,000, right?
    Mr. Strong. That is correct.
    Senator Sarbanes. Now, in the reworking of this thing she 
is going to come back with a mortgage of $27,500.
    Mr. Strong. That is correct.
    Senator Sarbanes. Which more approximates the value of the 
home, I take it, and would put the payments more within her 
grasp, so to speak; is that correct?
    Mr. Strong. That is correct.
    Senator Sarbanes. Now, Beeman walked away with $84,000, is 
that right?
    Mr. Strong. Yes.
    Senator Sarbanes. Who is going to absorb that loss, the way 
this thing will be structured?
    Mr. Strong. Ms. Adams was one of several dozen people 
represented by Andre Weitzman, who sued the lenders, the 
appraisers, the title companies, and everyone who was involved 
in the transactions of Robert Beeman and another individual who 
has recently been charged criminally, Walter Dirsh. So it is 
only through the lawsuit that the agreement to reduce the 
mortgages on these houses has been made.
    HUD has had a frustrating time getting lenders to do that 
voluntarily. But without the lawsuit, we would not have the 
possible solution. It is coming to conclusion soon. We are not 
at settlement on the new mortgage and Ms. Adams is still 
suffering in a bad house, but we are getting there, but only 
through the lawsuit.
    Senator Sarbanes. Now, does the lender then bear the loss 
or do they get back at Beeman?
    Mr. Strong. Well, the lender--Beeman is serving time in 
Federal prison. I am not sure what resources you can go after 
in his case that are left. He has been fined in Federal court 
and is serving close to 3 years in Federal prison.
    The lenders were victims in this as well and they had to 
take the loss in the lawsuit, along with the insurance 
companies of the professionals who were involved in the case 
who did wrong.
    Senator Sarbanes. Now, you are working some others out, I 
gather, as well along the same path; is that correct?
    Mr. Strong. Yes. But the point I make is they are 
exceptions to the rule. I wish we had more----
    Senator Sarbanes. Why are they exceptions? Why cannot the 
process that is working for Ms. Adams and the others that you 
have indicated be institutionalized as a regular process to 
provide remedy for, if not all, at least most of the people who 
have been affected?
    Mr. Strong. The case that Mr. Weitzman brought against 
Beeman and Dirsh and their cohorts was a 3 to 4-year process of 
civil litigation. There is civil litigation that is being 
undertaken by Civil Justice, Incorporated. Its director is here 
this morning, Dennis Murphy. St. Ambrose has undertaken some 
legal actions.
    But in the private bar we do not have enough people with 
either the expertise or patience or ability to take on these 
very big cases. I wish we did.
    Senator Sarbanes. Why should not the city and HUD, working 
together, pick up this burden, so you would have a joint legal 
task force, that in effect you did not have to depend on 
people? I commend Andre Weitzman. I think he has made really a 
very significant and substantial contribution. But he has 
really in a sense performed a real act of public service. He 
has invested an enormous amount of his time and effort trying 
to correct these terrible wrongs.
    I do not know why we should be dependent or look to that 
kind of private contribution. Why is there not a public 
obligation here to be picked up on by, say, a joint legal task 
force by the city and by HUD to pursue these matters?
    Mr. Quayle. There is an effort going on, Senator Sarbanes. 
HUD has established a program of reducing these mortgages for 
the people who qualify, the people they judge as eligible. It 
is not always that easy because, as Frank tried to say, for 
many of the borrowers even when you reduce the mortgage to the 
fair value the people cannot buy the house, they cannot afford 
it. Their credit has been destroyed. They are in bankruptcy.
    It is very complicated. It is very complicated. So what HUD 
is trying to do is say, well, in that case, the people that 
have judgments on them for not paying gas and electric bills or 
other things, what we are doing with one case--and hopefully it 
is going to be the beginning of others--is HUD is going to sell 
the house to a nonprofit, who will rent it to the family for 
the few years it takes for the family to get back on their feet 
and the family will then buy it at the fair price.
    That is one avenue that we are pursuing. That would be the 
solution for Mr. Smith's case here, to take that house--his 
house is worth maybe $40,000. He bought it for $70,000; reduce 
it to $40,000. He is in a situation where as he gets that full 
employment back he will be in a position to afford that house 
at $40,000.
    There are families out there like Mr. Smith's, but there 
are also a lot of others who, even at the new price, cannot 
afford to buy the house.
    Senator Sarbanes. Well, they were lured in, in a sense, 
lured into buying a house and it was way over their head in 
terms of being able to handle it, correct?
    Mr. Quayle. Right. What we are hoping to do there is get 
them relocation money so they can go out and at least rent a 
decent place. But as Frank mentioned, the landlords do not want 
to rent to them because they are coming out of a foreclosure, 
their credit has been destroyed, they are in bankruptcy. It is 
very hard to get the landlords to agree to rent to these folks.
    Mr. Strong. Senator, I think your idea is excellent and 
that we ought to pursue it with HUD and HCD. It is exactly what 
I was saying. We need to put the kind of resources into 
resolving these problems that it requires. Too often, 
government lawyers tell you what you cannot do. We need 
government lawyers, as the strike force tells us, to tell us 
what we can do to make it right for these families.
    Senator Sarbanes. Well, I think I have used up my question 
time. I yield back.
    Senator Mikulski. Senator Sarbanes, your line of 
questioning, as usual, is quite excellent.
    Ken, as I understand it, though, when HUD actually took 
action in terms of the lender community, they challenged HUD's 
authority and therefore slowed down the whole process. Am I 
correct in that?
    Mr. Strong. I think HUD in its testimony should address 
that. If they need additional authority to do the right thing, 
they ought to seek it.
    Senator Mikulski. Was that your observation?
    Mr. Strong. Yes. They attempted to do this and were 
frustrated by the lenders administratively. I do not think we 
had the full legal team going after it the way Senator Sarbanes 
suggested.
    Senator Mikulski. Well, I think the purpose of this hearing 
was that we view this situation as a work in progress. But 
while we work, we must make progress. It seems to me we have 
really gotten bogged down. We have gotten bogged down in HUD 
rules, legal rules, the plight of the community. I think there 
needs to be among all of us a greater sense of urgency, both in 
terms of the families that have been victimized, the 
prevention, and the cleanup.
    Now, let me go to Ms. Adams here. In your testimony on 
pages 7 and 9, you said she was one of the lucky ones. Well, 
first, luck does not count. Luck is great in a lotto. It is 
terrible in homeownership.
    Ms. Adams, you do not seem to feel you are one of the lucky 
ones. As I understand from your testimony, you are not only no 
better off this time, this year, but you are worse off because 
of the collapse of the infrastructure of your home.
    Ms. Adams. Yes.
    Senator Mikulski. Yet you seem to be in limbo as to where 
you should go, what you should do, what you should be paying, 
and what you should be listening to. Am I correct?
    Ms. Adams. You are correct.
    Senator Mikulski. I am not doubting you, Ken, but in your 
testimony it sounds like the Adams situation is straightened 
out, when the Adams situation is not straightened out.
    Mr. Strong. No, I described it as light at the end of the 
tunnel. It is not straightened out yet. It has been a 
frustrating negotiation, taking longer than anyone wanted. 
First Mariner Bank with the lawyer and the housing counselor, 
and the Abell Foundation had to step in during the process to 
guarantee the loan part.
    It should be closing soon, in a month, but we are not there 
yet.
    Senator Mikulski. Could I interject.
    Mr. Strong. Yes, ma'am.
    Senator Mikulski. I understand it is a frustrating process, 
believe me. But could you identify each step, how it can be 
different next time for the next person?
    Mr. Strong. Yes.
    Senator Mikulski. So what happened with the bank? Do you 
see what I am trying to get at?
    Mr. Strong. I do.
    Senator Mikulski. And how at the end of this hearing Ms. 
Adams can know where to go to and have a 9-1-1 safety net.
    Mr. Strong. After this hearing we will arrange with Ms. 
Adams to sit down with the housing counselor, the bank, the 
lawyer. It is close, as has been reported to me, it is close to 
resolution. That has not been communicated clearly. We are 
going to close that gap. This is one case that I do believe we 
are close to resolving, but we need to be better communicating.
    Senator Mikulski. What happened when you went to First 
Mariner? What happened at each step?
    Mr. Strong. Well, at first--at first the bank had 
difficulty with the value of the house, given the condition of 
the house. So they were unwilling to make the loan if the house 
was not in good condition. That took some negotiating. That 
took a while, to get to that point.
    That is when we went to the Abell Foundation and said: In 
some of these cases, could you guarantee the repair portion of 
the loan? They considered that.
    Senator Mikulski. So that is an issue.
    Mr. Strong. Yes, it is.
    Senator Mikulski. In other words, the bank was right in the 
sense of looking at what they were getting back into.
    Mr. Strong. That is correct.
    Senator Mikulski. Again, I am into pinpointing, not 
fingerpointing.
    Mr. Strong. That is right.
    Senator Mikulski. So there needs to be another force where 
some of the houses are so deteriorated.
    Mr. Strong. Exactly.
    Senator Mikulski. Go ahead.
    Mr. Strong. And HUD has found this also in its attempts to 
help people.
    Senator Mikulski. Now, keep going on to each step.
    Mr. Strong. In its attempts to help people, the repairs 
issue has been a frustration. I think Ms. Maggiano will speak 
to that.
    Senator Mikulski. What was the next step?
    Mr. Strong. The next step was--actually, prior to that were 
the continuing steps that took a very long time in the lawsuit 
against Beeman and the other people involved.
    Senator Mikulski. Okay.
    Mr. Strong. So we could not get to the help point until 
that lawsuit was resolved fully.
    So the bank, the repairs, and the Abell Foundation's 
guarantee. The housing counselor, Carl Cleary, has been doing a 
great job working with very many families.
    Senator Mikulski. I am sure.
    Mr. Strong. So he has been working with Ms. Adams and 
trying to help arrange for the repairs. She had, Ms. Adams had, 
a 13 percent interest loan with a balloon payment after 15 
months.
    Senator Mikulski. I remember that. That was so horrifying.
    You were going to owe $57,000. I will never forget that 
when you said that. I have shared your story with my colleagues 
in the Senate.
    So then you had to renegotiate the loan.
    Mr. Strong. That is right, and the new loan will be at 7 
percent. The monthly payment used to be $650. It will be around 
$345. But I understand there are a couple steps in the 
settlement process that have yet to get to settlement, but that 
that should be soon.
    Senator Mikulski. Well, again, we will talk that over, but 
it seems to me that Mr. Cleary, doing an outstanding job, has 
more than he can handle. Is this not what is happening in our 
advocacy groups?
    Mr. Strong. Yes, it is.
    Senator Mikulski. There is a limit to being able to handle 
all of these cases--Frank, excuse me. Frank. Is this another 
resource issue?
    Mr. Strong. That is correct, yes, you are.
    Senator Mikulski. For the nonprofits working on cleaning up 
the swamp that the predators have left.
    Mr. Strong. These are difficult, intense cases, and we need 
more resources.
    Senator Sarbanes. What is the lender that lent the money to 
sustain Beeman's $84,000 sales price?
    Mr. Strong. The originating lender in many of these cases 
was McCowan Funding and the president is in jail today. Then 
those loans were quickly sold to any number of people in the 
sub-prime market, companies that buy up loans at high interest 
rates.
    Senator Sarbanes. So I want to be clear. First Mariner was 
not the lender involved?
    Mr. Strong. They were not.
    Senator Sarbanes. They are coming in now in a sense trying 
to be helpful and be a good corporate citizen, is that correct?
    Mr. Strong. That is correct.
    Senator Sarbanes. I wanted to be clear about that on the 
record, because my understanding is that it is the combination 
of First Mariner and the Abell Foundation working together that 
is making it possible to work out Ms. Adams' situation.
    Mr. Strong. That is exactly right.
    Senator Sarbanes. Well, Vinnie is right, it is very 
complicated, no question. We have a number of people who have 
taken on a homeownership responsibility who never should have 
done so. They were just enticed into that situation. Would that 
be a fair description?
    Mr. Quayle. Yes, absolutely.
    Senator Sarbanes. For them, probably the only remedy is 
relocation to rental housing.
    Mr. Quayle. Right.
    Senator Sarbanes. Now, is HUD and the City HCD providing 
the assistance that is necessary in order to do this 
relocation?
    Mr. Quayle. HUD has been providing $2,000 to a half a dozen 
families so far that we know of and that is solving those 
families' problems. We are hoping there will be a lot more of 
that and we are hoping that our landlord community will come 
forward and say: Listen, we will be willing to overlook that 
foreclosure and find an apartment. That would be wonderful, if 
you could use your influence with the property owners 
association here in Baltimore to see if they would not step 
forward and help some of these families even though they have 
bad credit.
    We are able to put down 2 months security deposit or maybe 
even 3 months as added security for the lender.
    Senator Sarbanes. Now, these are people that, even if the 
loan were written down, crammed down, as we are going to do 
with Ms. Adams, they still would not be able to handle it, is 
that correct?
    Mr. Quayle. That is right.
    Senator Sarbanes. What percent of the total affected would 
you say are in that category?
    Mr. Quayle. Frank, you see these families. Are you awake, 
Frank?
    Mr. Fisher. I just dozed off for a minute. Yes.
    What percent? I do not know. The case of Ms. Adams is the 
sub-prime lender. It has nothing to do with HUD. There are 
1,200 houses last year went to foreclosure that were not FHA, 
they were not refinance. They were purchase money mortgages, 
somewhat similar to the Beeman type scam, where they inflated 
sale price, just a paper sale price of $85,000, first mortgage 
of $50,000 and a bad house.
    Ms. Adams is one of, I do not know, an awful lot, I will 
tell you that. There is a carload of people out there like Ms. 
Adams.
    Senator Sarbanes. Well, actually Ms. Adams as I understand 
it is in a situation where if she can get the mortgage crammed 
down to a realistic figure, she can then handle the payments 
and continue to move ahead on owning her home. Is that correct?
    Mr. Quayle. Yes. Frank?
    Mr. Fisher. I would say yes.
    Senator Sarbanes. Unlike people who, even if the mortgage 
were crammed down, cannot handle the home. They actually have 
to move over into the rental.
    Mr. Fisher. If the house was okay, if the roof did not 
leak, if the furnace worked, if the plumbing was okay, if the 
electricity is in there, and the price was right, the family 
could probably--she would probably be okay. You would be okay. 
Put Ms. Adams in a good house and she will be okay. Put her in 
a lousy house--she is lucky enough to have gone to Carl Cleary 
and he did something.
    But the folks who do not get to the Carl Cleary's lose 
their house.
    Mr. Strong. Senator, I think we do not know exactly how 
many need relocation help because homeownership is not in the 
cards for them, was not then, is not now. HUD is reviewing all 
of the cases that we have referred, over 300 of them, to their 
office and trying to examine exactly that: Who can be helped to 
remain as homeowners and who really needs relocation 
assistance?
    Senator Sarbanes. What do we do with the houses that the 
people are in who cannot handle them, who need to be relocated 
into rental housing? Let us assume you can accomplish that. 
That is a big challenge. But then if they move into rental 
housing and then there is a house left there, right?
    Mr. Quayle. Right.
    Senator Sarbanes. What happens there?
    Mr. Quayle. If it is in a good neighborhood, like Bel Air-
Edison, it is going to go back on the market and be sold either 
to a homeowner or to an investor, who would convert it to a 
rental or flip it again. If it happens in Patterson Park, 600 
block or 700 block north of the park, it is going to sit there. 
No one is going to buy it. No one wants to do anything with it.
    So it depends on where the houses are, the neighborhoods. 
This dollar house program, I have to be honest with you, I am 
not buying dollar houses down in East Baltimore on bad streets. 
I am buying dollar houses in Waverly, Bel Air-Edison, Hamilton. 
I bought one in Guilford, 300 block Southway.
    So to answer your question, if it is in a decent 
neighborhood something good can happen to it. If it is in one 
of the--you have three categories of neighborhoods, Senator 
Mikulski----
    Senator Mikulski. Stable, stress, and siege.
    Mr. Quayle. If it is the siege neighborhood, the chances 
are it is going to sit there and just continue to deteriorate.
    Senator Sarbanes. That is the sort of portfolio that HCD 
confronts, then.
    Mr. Quayle. That is right. It will go into their portfolio 
of vacant houses, right.
    Senator Sarbanes. I see my time is up.
    Senator Mikulski. Mr. Smith, first of all, we thank you for 
coming. We know it is not easy to come forward, as Ms. Adams 
knows, and admit that you have been cheated. But the fault was 
not yours. We salute you, trying to hold your family together. 
We further commend you for trying to find not only a better 
house, but a better way of life for your children while you are 
struggling with this. So do not feel bad, and we are glad to 
see you.
    Let me ask the question about your predatory situation. You 
are in a foreclosure situation because you lost your job and 
now you are in the process of getting back into the 
marketplace. But where did the flipping occur? Do you know what 
that house sold for? Did you have an appraisal that you looked 
at? Did you have a home inspection that you knew what you were 
getting into?
    Mr. Smith. It is my belief that all of that took place 
prior to me sitting down at the table with Lucky Realty 
Company. All of that had been done. The price they came up with 
with me for that particular house was $70,000. We had visited 
the property with one of their agents several times during the 
construction or reconstruction or renovation period and we saw 
it at one phase, then the next phase, then the next phase.
    When we sat down at the table, we started signing papers--I 
started signing papers.
    Senator Mikulski. Well, Mr. Smith, as you know, I am very 
much interested in the prevention aspects. If we look at a 
public health model, if we were hit by an epidemic, which this 
is, our first thing is prevention. What do you think you would 
have liked to have been able to turn to or what would have 
helped you from getting into this situation in the first place?
    Mr. Smith. Someone has said it before: education. Maybe 
being aware of this type of practice. I had no idea of what a 
flip was. I thought I was getting into a situation where I was 
going to have a better home for me and the boys. As a matter of 
fact, as we talked to these people, that is all they talked 
about, was a better situation for me and my two sons.
    Senator Mikulski. But Lucky Realty filed all the papers for 
you, is that correct?
    Mr. Smith. Yes, when I sat down at the table I just started 
signing.
    Senator Mikulski. That was at settlement.
    Mr. Smith. Yes.
    Senator Mikulski. But prior to that, they submitted all the 
papers; is that correct?
    Mr. Smith. Yes, ma'am. Yes, Senator.
    Senator Mikulski. So then you did not even talk to a 
mortgage lender? They arranged that for you?
    Mr. Smith. He was at the table, too, Bank of Virginia or 
some kind of bank in Virginia. He was there, too. As a matter 
of fact, I talked to him first. He was at the long table, him 
and I.
    Senator Mikulski. We all know about those long tables and 
those tons of papers. But you did not go to Bank of Virginia? 
Lucky Realty went for you?
    Mr. Smith. That is correct.
    Senator Mikulski. I see.
    Well, I think Mr. Smith is a perfect example of an honest 
man, an intelligent man, a guy who would want to be very 
rigorous in protecting his family and his pocketbook. So this 
is an indication.
    Let me go to the last part of what my questions are. This 
goes to what to do about something called HUD houses. You know, 
a HUD house should have a good name to it, but the minute you 
hear ``HUD house'' tremors go through neighborhoods. Vinnie, 
could you tell us, what is this dollar program that you are 
talking about?
    Mr. Quayle. The dollar house was started, I believe----
    Senator Mikulski. Because we had the old dollar house from 
old homesteading.
    Mr. Quayle. No, it is not like the dollar house from the 
seventies. Because of HUD's large inventory in cities like 
Baltimore, HUD made agreements with the local jurisdictions 
that if they could not market their failures within 6 months 
through the real estate industry and through the company that 
they hired to manage them, they would offer those houses for 
one dollar to the City of Baltimore, our Housing Department.
    The Housing Department then has--I think there are three 
nonprofits participating right now. They will assign that house 
to either St. Ambrose, Ed Rukowski's group in Patterson Park, 
or Park Heights, a group up in Park Heights. They are the only 
three nonprofits participating.
    I think Michael Guy is here. I think he said----
    Senator Mikulski. Is this a good idea?
    Mr. Quayle. Oh, it is an excellent, excellent idea.
    Senator Mikulski. Then what happens after they assign these 
houses and they go to you? Why is it an excellent idea and what 
should we learn from it?
    Mr. Quayle. Two things happen at St. Ambrose. Because of 
this dollar house program, we are able to get private money 
from Freddie Mac and Fannie Mae to renovate these houses. We 
are renovating them totally. We are overimproving them so that 
they are the best house in the neighborhood. Then we are 
selling them through the real estate or through the private 
real estate market.
    We are going to do 50 houses this year. I will bet it is 
more than any nonprofit in the whole country who is dealing in 
scattered site single family houses. We have never done more 
than ten a year.
    Senator Mikulski. So this dollar house idea is a good idea.
    Mr. Quayle. Oh, it is wonderful, wonderful.
    Senator Mikulski. Ken, could you tell us other ideas on 
what to do with HUD houses, because I know we are running a bit 
late now.
    Mr. Strong. Yes, I will be brief. The dollar house idea is 
excellent for another reason. It takes those HUD houses out of 
the hands of investors and speculators who are not going to do 
good things with them and puts them in the hands of nonprofits, 
like St. Ambrose, that are.
    The other thing that we need to look at with HUD houses is 
who repairs them. A HUD house stays vacant in a neighborhood 
far too long. Even the dollar houses are there for 6 months 
before they are available to nonprofits. We need to invest some 
of that FHA success, the billions of dollars in the FHA fund, 
in maintaining the HUD inventory and making it available more 
quickly to homeowners and to nonprofits, people who are doing 
good things with them in the neighborhood.
    Senator Mikulski. Well, we are going to talk to Mr. 
Graziano and Ms. Maggiano about some of the others.
    Senator Sarbanes.
    Senator Sarbanes. I just have a couple of questions, 
because I know we want to go to the next panel. Vinnie, on your 
statistics, I want to be clear about this. You have FHA 
foreclosures initiated of 1,453.
    Mr. Quayle. Right.
    Senator Sarbanes. That is in the entire city of Baltimore?
    Mr. Quayle. That is right.
    Senator Sarbanes. Then you compare that with Matt 
Franklin's assertion about nationwide. But what was the number 
in 1996, do you know? The 1,453, what would that number have 
been in 1996?
    Mr. Quayle. You know, I do not know the answer to that. I 
can get it for you.
    Senator Sarbanes. Would you, please?
    Mr. Quayle. You know, I think HUD is going to have to get 
me--we do not have that. I do not have that number. That does 
not appear in the Lusk Real Estate Reports, which is where we 
get all this information. But HUD certainly has that number. 
They can tell us how many loans went into foreclosure in 
Baltimore in 1996.
    Senator Sarbanes. That would be a better way to judge how 
much of an upswing there was.
    Mr. Quayle. Right, right.
    Senator Sarbanes. Now, on the 3,100 loans originated, FHA 
loans originated in the year 2000, is that in the entire city 
of Baltimore?
    Mr. Quayle. Yes.
    Senator Sarbanes. Now, if you took the hot areas, as we 
described them, where these practices--because there are some 
areas of the city presumably where the FHA-originated loans--
where these practices either do not take place or are very 
rare; is that correct?
    Mr. Quayle. You would be surprised at how large an area of 
the city this is happening in. All of Northwest, West, East 
Baltimore, and now more and more in Northeast Baltimore as 
well. But certainly not in Locust Point, and I do not even know 
if there are any FHA loans down in Locust Point, but certainly 
not in the real healthy neighborhoods you do not have this 
going on.
    Senator Sarbanes. All right. Now, what if you took--would 
you say half of the loans originated are in these difficult 
neighborhoods?
    Mr. Quayle. I would say more. I would say two-thirds.
    Senator Sarbanes. Two-thirds, so that would be 2,000.
    Mr. Quayle. That is right, at least, at least.
    Senator Sarbanes. All right. Now, suppose the FHA required 
a loan being originated in the difficult areas to get a signoff 
from an FHA employee based on a phone conversation with the 
prospective purchaser, in effect where you said this thing 
cannot go through unless--well, let us say call instead of 
meet, because that is even more complicated, but unless you 
call in and we go through this checklist of questions for you, 
and where they ask the sort of questions we were talking about 
earlier before they will let that loan originate.
    Mr. Quayle. That would be beautiful. That is exactly what I 
think should happen. The first question could be: Did you get a 
home inspection? That is exactly. I would have thought that was 
too much to ask for, but if someone could be talking to that, 
and it could be an FHA employee, in the vulnerable 
neighborhoods and just ask a few simple questions, we would get 
a lot better understanding of whether or not this is going to 
be a workable loan.
    Senator Sarbanes. Well, maybe I am missing. I will ask the 
HUD people when they get here. If you had 2,000 loans and they 
did a half an hour question on each loan, that is 1,000 hours, 
right? So that is within one person's capabilities in a year's 
time.
    Mr. Quayle. Absolutely.
    Senator Sarbanes. So it is not an overwhelming thing in 
terms of staffing.
    Mr. Quayle. No.
    Senator Sarbanes. Okay. Thanks very much.
    Senator Mikulski. Well, we want to thank our panelists and 
our constituents. We hope that before you leave today there is 
even more clarification on how to help. Thank you for your 
ideas and your advocacy.
    We would now like to go to the second panel to get a sense 
of where government is in all of this. We call: Mr. Paul 
Graziano, the Commissioner of the Department of Housing for the 
City of Baltimore; Ms. Laurie Maggiano, HUD's Single Family 
Division Director of Asset Management; and Mr. Stephen 
Schenning, the Acting U.S. Attorney for the State of Maryland.
    Senator Sarbanes has to take care of a phone call and will 
be returning shortly. We want to welcome all three of you. Mr. 
Graziano, why do you not lead off and, Ms. Maggiano, we will 
hear from you, and then we will hear from our very able, of 
course, Mr. Schenning, who has been doing an outstanding job as 
the Acting U.S. Attorney.
STATEMENT OF PAUL T. GRAZIANO, COMMISSIONER, CITY OF 
            BALTIMORE, DEPARTMENT OF HOUSING AND 
            COMMUNITY DEVELOPMENT
ACCOMPANIED BY JOANN COPES, DIRECTOR OF DEVELOPMENT, BALTIMORE HOUSING 
            AND COMMUNITY DEVELOPMENT

    Mr. Graziano. Thank you, Senator Mikulski, and Senator 
Sarbanes when he arrives back as well, for your leadership on 
this issue and including calling this very illuminating hearing 
this morning. For a relative newcomer to the area, this has 
been very, very helpful for me as well and I have been taking 
furious notes and I think that there are a lot of things that 
we are doing and more that we can do. I would like to just read 
my opening statement and then of course be available for 
follow-up questions.
    Much has been written concerning the nature of property 
flipping and predatory lending and the terrible toll they have 
taken. Others at this hearing have spoken eloquently about this 
issue, so I will not repeat the sordid details. But I do want 
to point out that, beyond the very real harm inflicted upon 
victimized buyers, property flipping and the resulting 
abandonment causes a tremendous drain on public resources and 
dramatically obstructs broader community revitalization 
efforts.
    A cornerstone of the city's program to revitalize these 
communities is sustainable homeownership. We must create a 
climate where current owners wish to and are able to stay and 
where new home buyers from a broad range of incomes will have a 
stake in the neighborhood's future.
    Some of our current efforts to address the problems include 
a public awareness campaign, the Attorney General's town hall 
meetings on flipping, and the pamphlet for prospective home 
buyers, the Bankers Association consumer education program, a 
hotline. Also, the city is moving toward requiring housing 
counseling to all home buyer incentive programs, including our 
SELT program. Participating lenders in all city home buying 
initiatives are being asked to outline plans to detect and 
deter real estate fraud in their transactions.
    All the loans that are underwritten by the city staff are 
carefully evaluated and prospective buyers are also urged to 
engage a home inspection service for evaluation of the 
property.
    I would like to at this time also thank you for the 
announcement this morning of the $5 million award. Let me just 
talk a minute about what kinds of activities will be undertaken 
with that money. The city has designed something called the 
neighborhood recovery program, which really is in three parts: 
a $1.5 million community-based stabilization initiative, a half 
million dollar flipping victim clearinghouse operated by St. 
Ambrose--and I should point out there that currently victims 
have to go to five or more different organizations to obtain 
services to address their needs. This will bring all the 
services into one clearinghouse. And the healthy neighborhoods 
initiative funding. $3 million in Federal funds for this grant 
will be supplemented by State and local dollars to provide 
things, including 3 percent loans for 30-year terms both for 
current homeowners who want to do rehabilitation work on their 
property and for those who are being encouraged to purchase and 
rehabilitate properties in these targeted neighborhoods.
    Something that has not come up this morning, but I think it 
is a very important related issue the section 8 program. 
Section 8 is a program that we believe can be utilized to help 
create sustainable homeownership as well. It is a program we 
will be embarking upon, and as we design this program we will 
be very mindful of the pitfalls and the concerns about 
sustainable homeownership.
    Also, as an aside I will say that the section 8 program 
unfortunately has been utilized by some of the same predatory 
real estate folks to drain the life out of neighborhoods. So we 
are going to have at least a two-pronged approach. One is 
dealing with predatory lending and flipping schemes. The other 
is to clean up our section 8 program so that neighborhoods will 
not be hurt by either FHA action or by our operation of the 
section 8 program.
    Also in relation to this effort, we will be coordinating 
the efforts with those related to our strategic demolition 
program. This is something extremely important. We talked about 
some of these properties that will be taken back. 
Unfortunately, some of them probably need to be slated for 
demolition, and we want to make that part of our strategic 
program.
    On the HUD side, they have strengthened their fraud 
detection procedures, including property appraisal reviews. 
They have re-
reviewed 500 previous loan referrals to determine if there is 
an inflated mortgage. Where fraud has likely occurred, HUD is 
offering various types of assistance to borrowers. As part of 
its commitment to try new methods and ideas, HUD agreed that 
the city could assign dollar house contracts to qualified 
nonprofit developers so the houses could be redeveloped to a 
high standard of resale or rental. We heard an enthusiastic 
endorsement of that, obviously, from Vinnie Quayle. To date, 
the city has contracted for about 85 FHA properties, which are 
turned over to three nonprofit developers.
    Much has been accomplished, but we do see a number of 
statutory and regulatory changes that need to be addressed to 
continue the effort. On behalf of the flipping task force, I 
have collected these suggestions and recommendations from the 
task force in recent days. I will just walk through these 
quickly.
    First, FHA needs the authority to use insurance funds as a 
way to prevent foreclosure, not waiting until after 
foreclosure, but to free up some of these dollars in advance, 
and we think that may require some legislative authority.
    Second, we believe HUD would be more successful in 
disposing of its REO from FHA foreclosures if it hired a local 
agent to handle these dispositions and provided resources to 
bring properties up to full FHA standards before marketing. The 
HUD foreclosed properties would then become an asset in a 
neighborhood, not a further drain on property values. It is 
extremely important that they be rehabilitated to the highest 
levels and sold at market rates.
    The FIRREA legislation set a monetary threshold which 
classifies mortgage transactions below $250,000 as de minimis. 
Only those transactions exceeding that amount require the use 
of licensed or certified appraisers. The de minimis provision 
should be eliminated so that all appraisers in all mortgage 
transactions are held to the highest standard.
    The fourth point: All licensed and certified appraisers 
nationwide are required to subscribe to uniform standards of 
professional appraisal practices. Federal law should define 
violations of these standards as criminal.
    Five, direct assignment of appraisal work to FHA-approved 
appraisers by mortgage lenders subject to appraisers to 
potential--subjects appraisers to potential lender pressure to 
come up with the right value, that is values that will support 
the contract sale price of the property. The appraisers are 
sometimes reluctant to say no. They are fearful that they will 
not be selected again.
    FHA should go back to a HUD-approved appraiser panel, with 
appraisers assigned on a rotating basis by FHA. In addition, 
FHA needs to institute a local appraisal review system. 
Currently, appraisals for FHA loans are sent to far distant 
review appraisers who are not familiar with the Baltimore 
market and that can have a profound impact. Small distances 
make big differences in terms of the value of a property, block 
to block differences.
    Number six, the direct endorsement system has allowed many 
bad loans which in no way meet FHA underwriting standards. 
While the credit watch system can eventually catch lenders with 
high foreclosure rates, FHA's direct endorsement system needs 
to be eliminated or substantially modified.
    Number seven, the Federal Real Estate Settlement and 
Procedures Act, the RESPA, should be amended to provide for 
penalties against title agents who fail to make the necessary 
verifications of the financial details shown on the settlement 
sheet. We have certainly heard stories today about people 
fabricating information to make a loan qualify.
    Number eight, on a pilot basis a Baltimore neighborhood 
should be designated wherein every first-time home buyer 
seeking an FHA loan would be required to complete counseling 
prior to home purchase. Foreclosure rates in this neighborhood 
would be compared with those in comparable neighborhoods where 
counseling is not required.
    Number nine, investors with criminal backgrounds or with a 
record of shoddy property management or maintenance practices 
should not be allowed to purchase HUD properties.
    Number ten, HUD said it would demand that lenders reduce 
mortgages to appropriate levels when it found mortgages that 
exceeded 120 percent of fair market value. Unfortunately, 
lenders refused to voluntarily make the mortgage reductions and 
FHA apparently may not have the authority to do so. This needs 
to be changed. It may require some statutory change.
    Number 11, one of the penalties for banishment from FHA 
programs because of fraudulent lending practices should be an 
ability by FHA to decline to pay further claims.

                           PREPARED STATEMENT

    I will close by saying certainly, the task force certainly 
supports Senator Sarbanes' authorization bill and I am sure a 
number of these matters will be addressed there. In closing, I 
would just say these reforms will go a long way toward 
addressing the flipping problems and we are certainly committed 
to remaining vigilant to attack the new schemes and make 
recommendations, more recommendations as appropriate.
    Thank you for the opportunity to testify.
    [The statement follows:]

                 Prepared Statement of Paul T. Graziano

    Thank you Senator Mikulski and Congressman Cummings for your 
leadership on this issue, your encouragement in the formation of the 
Baltimore City Flipping and Predatory Lending Task Force and your 
support of its work over the past year. Your demand that HUD come to 
the table to uncover the facts about this crisis in Baltimore and to 
craft a response, has made all the difference in our ability to get a 
handle on this problem and to begin to cooperatively and collectively 
devise solutions.
    I must commend the Task Force for all the groundwork to investigate 
and frame this problem and its effect on individuals and our 
neighborhoods. The work of the task force has been a model of 
cooperation and mutual support from many sectors and at all levels. I 
would be remiss if I did not acknowledge many of those who have been 
around the table tirelessly working on this problem. We have had 
participation and input from advocacy groups, community based 
nonprofits, private attorneys representing victims, law enforcement 
agencies at the Federal and State level, secondary market leaders like 
Fannie Mae and Freddie MAC, the State Department of Assessments and 
Taxation, regulatory bodies and professional associations for lenders, 
appraisers, and Realtors, and many victims who have told their stories 
to help us understand how these schemes work. This has truly been a 
sustained, collaborative effort.
    Much has been written concerning the nature of property flipping 
and predatory lending, and the terrible toll they have taken. Others at 
this hearing have spoken eloquently about this so I will not repeat all 
the sordid details. But I do want to point out that, beyond the very 
real harm inflicted upon victimized buyers, property flipping and the 
resulting property abandonment, causes a tremendous drain on public 
resources and dramatically obstructs broader community revitalization 
efforts.
    Baltimore has an estimated 13,000 units of vacant and largely 
abandoned housing and growing disinvestment in certain neighborhoods. 
In these areas stable homeownership is declining and absentee ownership 
and speculation are on the rise.
    A cornerstone of the City's program to revitalize these communities 
is sustainable homeownership. We must create a climate where current 
owners wish to and are able to stay, and where new homebuyers from a 
broad range of incomes will have a stake in the neighborhood's future. 
Obviously, flipping schemes have a devastating impact on all these 
efforts.
Current efforts to address the problem
            Local Efforts
    The City, in partnership with the Greater Baltimore Board of 
Realtors, Maryland Center for Community Development and Fannie Mae and 
Freddie Mac provided funding and developed a public awareness campaign 
which included bus advertising, radio spots, T.V. public service 
announcements and printed brochures.
    Attorney General Joseph Curran has sponsored a series of Town Hall 
Meetings on flipping and predatory lending, and produced a useful 
pamphlet for prospective homebuyers--``Beware, Don't Buy Trouble.''
    The Maryland Bankers Association is producing a consumer education 
program designed to reach churches and community groups.
    The Maryland Center for Community Development staffs a hotline and 
makes referrals to non-profit housing counselors. This on-going service 
allows homeowners and prospective homebuyers to get information 
regarding suspected fraud and prevention of fraud in home purchase.
    The City has moved to require housing counseling on all homebuyer 
incentive programs as a means of prevention through education.
    Participating lenders in all City home buying initiatives are also 
being asked to outline plans to detect and deter real estate fraud in 
their transactions, and to investigate fraud that may have occurred in 
prior identified transactions.
    All loans that are underwritten by the City staff are carefully 
evaluated with checks on appraised value, previous sales price and 
prior purchase date prior to approval. In addition, the City is 
encouraging prospective buyers to select an independent home inspection 
company for an evaluation of property condition prior to purchase.
    We are also in the process of developing a low interest 
rehabilitation loan fund to improve property, raise housing values, 
strengthen civic involvement and increase confidence on targeted blocks 
in selected neighborhoods--our Healthy Neighborhoods Initiative. Those 
funds will begin flowing shortly. This is both a restoration and 
preventive measure. It is low values and a weakened market which makes 
communities vulnerable to those investors looking for opportunities to 
flip properties. Improved conditions and neighborhood confidence will 
deter predators.
    HCD has worked with Neighborhood Housing Services to assist in 
several fraud victims to remain in their homes by providing 
rehabilitation assistance to put the house in a safe and habitable 
condition.
            HUD/FHA Efforts
    HUD, through FHA, has strengthened its fraud detection procedures, 
including property appraisal reviews.
    HUD has re-reviewed over 500 previous loan referrals to determine 
if there is an inflated mortgage based on an over valuation of the 
property, and to look at the condition of certain FHA insured property 
which might not have met FHA standards as certified at purchase.
    Where fraud has likely occurred, HUD is offering various types of 
assistance to borrowers including credit repair letters, relocation 
expenses if necessary, the opportunity to repurchase the property at a 
fair market value if the buyer can qualify for a new mortgage, and a 
lease-purchase arrangement if it cannot. While lease-purchase 
arrangements may work to help some victims eventually repurchase, 
everyone recognizes this will not likely work on a large scale. We need 
to come up with more tools to help in these circumstances, which I will 
address more fully when I get to ``Recommendations.''
    HUD is continuing as part of the Task Force and has affirmed its 
commitment to try new ideas and processes, using Baltimore as its 
laboratory.
    The City has used the HUD Dollar House Program fairly extensively. 
HUD's Dollar House Program allows local jurisdictions the opportunity 
to purchase FHA foreclosed property that has been on the market for 6 
months or more, for a dollar. As part of its commitment to try new 
methods and ideas, HUD agreed that the City could assign Dollar House 
contracts to qualified nonprofit developers, so houses would be 
redeveloped to a high standard for resale or rental. To date, Baltimore 
has contracted for about 85 FHA properties which have, in turn, been 
assigned to three nonprofit developers--Patterson Park CDC, St. Ambrose 
Housing Aid Center, and the Development Corporation of Northwest 
Baltimore. Renovations are underway and houses are selling, 
legitimately, at the top of the market.
    So, much has been accomplished. But we see a number of Federal and 
regulatory changes that could be made to address the effects of this 
problem and to deter it in the future. On behalf of the Task Force I 
make the following recommendations:
FHA needs the authority to use insurance funds as a way to prevent 
        foreclosure
    Current law prohibits HUD from expending FHA insurance funds to 
address victim relief or other activities to preserve property and 
protect the FHA security in property prior to foreclosure. This is both 
short-sighted, and an impediment to assisting flipping victims who have 
taken their mortgage responsibilities seriously and have remained 
current on payments for those inflated mortgages. In many cases, we 
know these properties will remain at risk of default and foreclosure 
because of the failure of the sellers to make promised repairs and to 
bring the properties up to FHA standards. As conditions deteriorate, 
buyers cannot meet repair costs.
    FHA recognizes this, but its hands are tied in using the insurance 
fund to help those buyers bring the properties up to a satisfactory 
standard.
    We believe it would be more cost effective to provide funding for 
repairs, than to pay the insurance claim on a foreclosed property, and 
the costs of trying to dispose of an unmarketable property.
Revise FHA disposition practices
    We believe HUD would be more successful in disposing of its REO 
from FHA foreclosures if it hired a local agent to handle those 
dispositions, and provided resources to bring properties up to full FHA 
standards before marketing. Currently FHA takes an average $31,000 loss 
on a foreclosed property by the time it is eventually disposed of.
    We believe this loss can perhaps be decreased, while at the same 
time assuring timelier disposition of property by putting it in 
marketable condition, attractive to purchase by owner occupants, rather 
than bottom-fishing speculators.
    Furthermore, HUD foreclosed property will then become an asset in a 
neighborhood, not a further drain on property values. The HUD houses 
can set the market standard as opposed to evidencing the bottom of the 
neighborhood market as is often currently the case.
    An agent could expeditiously complete high quality rehabilitation 
and then sell property at a market rate to homebuyers not restricted by 
income or first time buyer status.
    FHA already has the authority to institute such a system and we 
encourage HUD to pilot such an effort in Baltimore as soon as possible.
Eliminate de minimus amounts specified under FIRREA
    The Financial Institution Recovery Reform and Enforcement Act of 
1989 (FIRREA), Title 11, has set a monetary threshold which classifies 
mortgage transactions below $250,000 as de minimus. Only those 
transactions exceeding that amount require the use of licensed or 
certified appraisers.
    Approximately 95 percent of all mortgages fall below the de minimus 
standard. The de minimus provision should be eliminated so that all 
appraisers in all mortgage transactions are held to the highest 
standards, and are accountable to regulatory bodies. An unlicensed 
appraiser is not held to any ethical standards.
Impose criminal penalties on negligent & fraudulent appraisers
    All licensed and certified appraisers nationwide are required to 
subscribe to the Uniform Standards of Professional Appraisal Practices 
(USPAP). Violation of these standards results only in administrative 
penalties. Federal law should define violations of USPAP as criminal, 
enabling Federal (and, by extension, State) prosecutions when 
appraisers are found to be complicit in fraudulent transactions.
    Related to this is the FIRREA provision allowing States to make 
appraiser licensing optional. It is probably no accident that the 
States with the highest rates of property flipping and predatory 
lending are license-optional States, such as Maryland. We believe 
FIRREA should be amended to eliminate that choice.
Restore FHA appraiser panels and a local appraisal review process
    The elimination of the appraiser panels and the local review of 
appraisals by HUD are likely two major reasons that appraisal fraud 
increased dramatically after 1996. The VA did not make this change and 
has experienced only a fraction of the problem that exists with FHA-
insured properties. Direct assignment of appraisal work to FHA-approved 
appraisers by mortgage lenders subjects appraisers to potential lender 
pressure to ``come up with the right value''--that is, values that will 
support the contract sale price of the property. Some appraisers are 
vulnerable to this pressure, fearing their work pipeline will be cut 
off by the lender if they do not cooperate.
    FHA should go back to the system used by VA--a HUD approved 
``appraiser panel'' with appraisers assigned on a rotating basis by 
FHA.
    In addition, FHA needs to institute a local appraisal review 
system. Currently, appraisals for FHA loans are sent to far distant 
review appraisers who are not familiar with the Baltimore market. Those 
of us who live here understand that the distance of a few blocks on a 
map can put you in very different real estate market conditions. Unless 
you have this local geographic perspective, you are unlikely to pick up 
bogus comparable sales used by some unscrupulous appraisers. FHA needs 
local review if it is to cut down on appraisal fraud in its programs.
Re-evaluate the lender direct endorsement system
    The direct endorsement system allows the lender to certify that it 
has underwritten the loan in accordance with all FHA requirements 
without further review by FHA. Unfortunately, as is often the case, a 
few bad apples can spoil the barrel. The direct endorsement system has 
allowed many bad loans which in no way meet FHA underwriting standards, 
to make their way into FHA's portfolio.
    While FHA's Credit Watch System can eventually catch lenders with 
high foreclosure rates and lead to their eventual loss of privilege to 
be a direct endorsement lender or to be banned from FHA programs, this 
is only an after-the-fact method of enforcement. By the time it is 
caught, the damage has been done.
    We believe FHA's direct endorsement system needs to either be 
eliminated, or substantially modified to assure the bad actors cannot 
participate.
Hold settlement agents accountable
    Fraudulent real estate transactions can only occur with the 
collusion of a number of parties, or at least the willingness of some 
parties to look the other way. Title companies also need to be held 
accountable. The Federal Real Estate Settlement and Procedures Act 
(RESPA) requires that settlement agents verify that the cash attributed 
to the buyer toward purchase is in fact money brought by the buyer to 
the transaction. However, there are no penalties for failure to do so. 
RESPA should be amended to provide for penalties against title agents 
who fail to make the necessary verifications of the financial details 
shown on the settlement sheet.
Initiate mandatory pre-purchase counseling
    On a pilot basis, a Baltimore neighborhood, perhaps Belair-Edison, 
should be designated wherein every first time homebuyer seeking an FHA 
loan would be required to complete counseling prior to home purchase. 
Foreclosure rates in this neighborhood would be compared with those in 
comparable neighborhoods where counseling is not required in order to 
determine the effectiveness of this effort.
Establish stringent standards for investor purchasers of HUD properties
    Investors with criminal backgrounds or with a record of shoddy 
property management or maintenance practices should not be allowed to 
purchase HUD properties. We are in full agreement with Ken Strong's 
recommendation that pre-qualification standards be set for investors 
who want to purchase FHA foreclosed property. HUD needs a system to 
assure that the bad guys do not use FHA property as a resource to 
continue their illegal business practices.
Provide legislative authority for FHA to require mortgage reductions
    As part of its effort to pilot remedial measures in Baltimore, HUD 
said it would demand that lenders reduce mortgages to appropriate 
levels when it found loans that exceeded 120 percent of fair market 
value. Unfortunately, lenders refused to voluntarily make the mortgage 
reductions, and FHA apparently has no authority to force them to do so. 
Adding insult to injury, if those inflated mortgages then end up in 
default and foreclosure, FHA must make good on the entire mortgage 
amount through the insurance fund.
    This needs to be changed. As it stands, lenders have no incentive 
to be more careful in checking values on lending, and secondary market 
purchasers have no incentive to do more due diligence with regard to 
the loans they are purchasing.
Ban FHA insurance payments to disqualified lenders.
    In the course of investigating predatory lending, HUD has 
determined that some lenders should be banned from its programs. 
However, claims by those lenders for transactions which took place 
prior to their disbarment, are still honored by FHA. One of the 
penalties for banishment from FHA programs because of fraudulent 
lending practices should be an ability by FHA to decline to pay further 
claims.
Assure enough review appraisers to make timely reviews of cases 
        referred for determinations of inflated mortgages
    We are very pleased with the recent HUD response to our plea to 
look again at the more than 500 cases of possible mortgage fraud which 
had been referred by the advocacy organizations and attorneys. This 
second review has resulted in determinations that a number of borrowers 
previously rejected for assistance have now been determined to be 
eligible for FHA's victim assistance programs.
    However, the initial review of cases and the re-reviews were 
hampered by the unavailability of sufficient review appraisers on the 
HUD list. This led to long waits on determinations. This is 
unacceptable as the affected households are in a crisis situation and 
may not be able to hold out for long periods of time without knowing if 
help is on the way.
    In closing, these reforms would go a long way in addressing the 
flipping problem and we are committed to remaining vigilant to attack 
new schemes and making additional recommendations as appropriate.

    Senator Mikulski. Thank you very much.
    Now we turn to Laurie Maggiano, who Secretary Martinez has 
personally designated as his liaison to the Baltimore predatory 
lending task force. We understand from all concerned that you 
have really been very actively engaged in this and express our 
thanks to Secretary Martinez for it.
    Ms. Maggiano. Thank you very much.
    Senator Mikulski. So now let us hear what you found and 
where you think we need to go.
    Senator Sarbanes. The Secretary very graciously placed her 
in the frying pan, I think.
    Senator Mikulski. Well, I do not know if you thank the 
Secretary, but we do.
STATEMENT OF LAURIE MAGGIANO, DIRECTOR, ASSET 
            MANAGEMENT AND DISPOSITION, SINGLE FAMILY 
            DIVISION, DEPARTMENT OF HOUSING AND URBAN 
            DEVELOPMENT
    Ms. Maggiano. Well, first of all let me say that the 
Secretary has asked me to thank both of you for the opportunity 
to come before you today to describe the recent progress that 
both HUD and the task force have made since your meeting with 
him.
    In April of last year, at your urging, HUD convened the 
predatory lending task force and last month at a meeting with 
both of you Secretary Martinez reaffirmed the Department's 
commitment to work with the task force and he promised some 
very specific and swift action on a number of issues. My 
remarks today will focus on HUD's progress on those issues, as 
well as some other priorities of the task force.
    During that April 3rd meeting, you suggested that a senior 
HUD official from headquarters be appointed to work with the 
Baltimore task force on a regular basis and, despite the fact I 
knew I would be on the griddle with the spotlight, in your 
words, Senator, I was honored when the Secretary asked me to 
assume that responsibility.
    For the last 4 weeks I have been dedicated nearly full-
time, heading a team of 15 senior staffers representing program 
development, the Philadelphia Homeownership Center, the Office 
of General Counsel, and Quality Assurance Division of HUD. The 
Secretary has also asked his Special Counsel, Bryant Applegate, 
to monitor our progress and to keep him personally informed. 
This is a significant commitment of resources and it 
demonstrates the importance that the Secretary places on the 
outcome of the work of the task force.
    Immediately following the April meeting and again at your 
request, the HUD team met with other task force participants to 
redefine criteria that had been used to evaluate 560 loans that 
had been referred as potentially predatory. Our first action 
was to notify mortgage servicers to suspend foreclosure actions 
on the loans in this group that were in default and to suspend 
eviction actions on those loans that had already been 
foreclosed. These suspensions will continue to be in effect 
until the task force completes the re-review to determine which 
loans are overvalued and which borrowers can be assisted.
    HUD's initial review approach had been to aim for a burden 
of proof that would support enforcement against the 
perpetrators and therefore it was to some extent purposely 
narrow. The re-review parameters focused on borrower assistance 
rather than enforcement. The expanded parameters are not 
limited by zip code, but encompass all of Baltimore City. The 
eligibility date was pushed back to January 1st, 1997, and the 
review was expanded to focus on overvaluation as well as simply 
flipping.
    Using information available to us, the HUD team has now 
completed a re-evaluation of all 560 cases. 225 of those 
borrowers did purchase homes that were overvalued. Of 
particular note are the 41 cases referred for re-review by 
Senator Mikulski, and of these 21 met the task force criteria 
for overvaluation and assistance will be provided to those 
borrowers. A list of the loans that did not meet our very broad 
redefinition of overvaluation has been delivered to the 
nonprofit task force participants with the request to them to 
provide us with any additional supplemental information that 
they may have that would support an overvaluation 
determination.
    HUD is committed to work with the task force on a case by 
case review so that no homeowner is arbitrarily denied 
assistance. Assistance is being provided to borrowers by HUD 
and the task force, though the type of relief available is 
dictated by circumstances unique to the borrower and the 
property. To date, the following assistance has been or is 
being provided:
    Foreclosure suspensions are enforced. Twelve borrowers have 
received relocation assistance checks. Mrs. Charlotte Ware is 
receiving funds from HUD to reinstate her mortgage and cure her 
delinquency, and these are funds she will not have to repay. 
Mrs. Sheila Marabell will be able to retain possession of her 
property following foreclosure through a lease-purchase from 
St. Ambrose, and we thank St. Ambrose very much for working 
with us to make that available to this homeowner. Without them 
it would not have happened.
    One hundred seventy eight credit explanation letters have 
been provided by HUD and 93 borrowers have recently received 
letters--they were mailed last week--providing them with the 
option of either relocation assistance, loss mitigation to 
reinstate their loans, or consideration for a property repair 
buyback option. I should say in all honesty that the number of 
borrowers who are going to be able to qualify based on the 
condition of their title and their credit history for the 
property repair buyback option is going to be small. That is a 
great disappointment to all of us.
    Beginning next week, HUD is detailing staff to the 
Baltimore office to work directly with these 93 borrowers and 
the task force counseling partners to expeditiously review each 
borrower's circumstance and provide available assistance.
    Senators, the HUD staff has been working with many of these 
borrowers for months. We have heard their stories. We have 
visited their homes and are intensely aware of the real and 
personal tragedies that they and their families have suffered. 
No one at HUD takes their suffering lightly.
    One of my greatest frustrations and one that I know is 
shared by everyone on the task force--and you heard it this 
morning--is the limited ability that the Department has to 
provide any direct assistance to the these homeowners. We do 
recognize the sense of urgency that you alluded to earlier and 
are committed to working with you to find the means that we 
need.
    As it is, the Department is pushing the envelope of its 
statutory and regulatory authority by providing the level of 
assistance that I have already described. One notable area of 
weakness is our ability to provide assistance to borrowers that 
are either current or only slightly delinquent on their 
mortgages, but who need help to pay for emergency property 
repairs. As an interim measure, HUD has proposed that the City 
of Baltimore re-allocate $1.5 million from the pending 
neighborhood initiative grant that you announced this morning 
and earmark this money for assistance to borrowers affected by 
predatory lending. But this will not go very far. In the near 
future other sources of funding will be necessary to provide 
for repairs and help borrowers permanently reduce overinflated 
debt.
    While borrower assistance has provided the greatest 
challenges and will continue to be an area of focus and 
concern, HUD believes that the most effective long-term 
solution to predatory lending is prevention. Since the 
initiation of the task force, HUD has focused, its prime area 
of focus has been on prevention.
    One of the lessons learned is that predatory flipping 
cannot happen without corrupt appraisers. During the past year, 
HUD has implemented a wide-ranging appraisal reform initiative 
that is already helping to prevent predatory appraisal 
practices by requiring licensing and testing of all FHA 
appraisers. This is especially important in Maryland, where 
there is no appraisal licensing requirement. The appraisal 
reform initiative also expands the appraisal report to include 
a full description of property condition and requires that the 
borrower receive a copy of the property condition report prior 
to closing.
    Finally, it provides a quality assurance statistical review 
of 100 percent of FHA appraisals that are made for origination 
purposes.
    Another preventative measure is a provision of the new 
government-supervised enterprise rule that became effective in 
January which specifically disallows housing goals credit for 
loans with predatory features. Soon to be issued is a proposed 
rule that will make flipped loans ineligible for FHA insurance. 
Also under consideration are policy and regulatory changes that 
would require mortgagees to use fraud prevention tools to 
screen new applications for indications of flipping, place 
strict limits on costs and fees that can be charged in the 
origination of an FHA loan, and provide increased authority to 
hold mortgagees more accountable for the quality of the loans 
that they purchase and/or service.
    Consumer outreach and education is another important 
element of prevention. HUD has provided a grant to ACORN to 
produce brochures and develop consumer education materials 
warning of predatory practices for use in housing counseling 
and at home buyer fairs. These materials will be tested here in 
the Baltimore laboratory, but will eventually be made available 
on a nationwide basis.
    Upcoming Baltimore community outreach events include 
training for all Baltimore area nonprofits on indicators of 
predatory lending, a series of bimonthly consumer education 
programs to begin later this month at the Pratt Library, and a 
June 16 trolley ride homeownership event, and a bank fair on 
June 30. That is just indications of some of the consumer 
outreach activities that are currently scheduled, but this will 
be an ongoing process.
    Also, through the neighborhood initiatives grant HUD is 
funding a predatory lending clearinghouse that will work 
directly with HUD staff on a review of the new predatory 
lending referrals that we have alluded to earlier in the 
testimony.
    Following closely behind prevention activities are HUD's 
efforts to get the perpetrators of such practices off the 
streets. In the past year the Department has initiated a wide 
range of enforcement actions against more than 140 individuals 
and organizations involved in FHA-insured loans in Baltimore. 
The origination and servicing practices of 54 lenders were 
reviewed, resulting in 13 referrals to the mortgagee review 
board, eight lenders who were terminated or proposed for 
termination under the credit watch initiative, and four more 
who have been placed on warning status. Ten lenders are under 
investigation by the Office of the Inspector General and 12 
lenders are on a probationary status that requires a 100 
percent post-endorsement technical review of the loans that 
they originate.
    Additionally, two real estate brokerage firms have been 
barred from the purchase and sale of HUD homes, 15 appraisers 
have been removed from the FHA roster, and 32 individuals have 
been referred for debarment, meaning that they will not be able 
to participate in any HUD program.
    Senator Mikulski. Is this in Baltimore or nationwide?
    Ms. Maggiano. This is in Baltimore.
    This is a strong record of accomplishment, but we know that 
there is a lot more to do. For example, in April a new task 
force subcommittee was established to explore strategies to 
better target the marketing of HUD-owned properties. I attended 
the first subcommittee meeting on May 3rd along with Cheryl 
Walker, the HUD REO director responsible for properties in 
Baltimore. During that meeting Cheryl agreed to several actions 
that will increase opportunities from owner-occupied sales of 
HUD homes.
    Specifically, we will expand the time period during which 
owner occupants have the exclusive right to bid on properties 
before they become available to investors. We will partner with 
nonprofit members of the task force to develop a property 
repair pilot to ensure that more properties are in move-in 
condition, and we will sell those repaired properties 
exclusively to owner occupants.
    Finally, we have encouraged the city and nonprofit partners 
to submit a proposal for the purchase of HUD-owned properties 
that is consistent with the goals of the healthy neighborhoods 
initiative. Harold Young, our senior community builder in the 
Baltimore office, is helping to coordinate this proposal.
    Throughout HUD's year-long participation in the Baltimore 
predatory lending task force, much good work has been 
accomplished, but there is much left to do. Let there be no 
mistake that Secretary Martinez and the U.S. Department of 
Housing and Urban Development are fully engaged in the effort 
to combat predatory lending in Baltimore City and across 
America. We will continue to work aggressively on borrower 
assistance, consumer education, prevention, and enforcement. 
But HUD does not stand alone in this effort. It will require 
the combined energy and contribution of all task force 
partners, as well as conventional lenders and mortgage 
insurers, to protect the citizens of Baltimore from predatory 
and abusive lending practices.

                           PREPARED STATEMENT

    We wish to thank both of you for your continued attention 
to this cause and we look forward to working with you and your 
staffs in the future. Thank you very much.
    [The statement follows:]

                 Prepared Statement of Laurie Maggiano

Introduction
    I am Laurie Maggiano, and Secretary Martinez has asked me to thank 
you for the opportunity to come before you today and describe recent 
progress that has been made by HUD and the Baltimore Predatory Lending 
Task Force.
    The Federal Housing Administration plays a key role in expanding 
homeownership opportunities by providing mortgage insurance to nearly 
130,000 Baltimore families. However, many low and moderate income 
neighborhoods in Baltimore have been destablized by predatory and 
abusive lending practices, turning the American dream of homeownership 
into a nightmare for families who have been duped into purchasing homes 
at inflated prices or with significant undisclosed repairs.
    In April of last year, at the urging of Senator Mikulski, HUD 
convened the Predatory Lending Task Force to involve a diverse group of 
citizens, elected officials, community advocates, legal and government 
staffers in the task of combating predatory practices in Baltimore 
City. Last month at a meeting with Senators Mikulski and Sarbanes, 
Secretary Martinez reaffirmed the Department's commitment to the work 
of the Task Force and promised specific and swift action on a number of 
issues. My remarks today will focus on HUD's progress on those issues 
and other priorities of the Task Force.
Resource Commitment
    During your April 3, 2001 meeting with the Secretary, you suggested 
that a Senior HUD official from Headquarters be appointed to work with 
the Baltimore Task Force on a regular basis. I was honored when the 
Secretary asked me to assume this responsibility. As Single Family 
Division Director of Asset Management and Disposition, I have policy 
responsibility for loan servicing, loss mitigation, foreclosure and HUD 
owned property sales. The important issues before the Task Force are 
directly in my sphere of responsibility, and I have the perspective to 
apply lessons learned from the Baltimore laboratory to refinement of 
national policy.
    For the past four weeks I have been dedicated nearly full time to 
heading a team of 15 senior staffers from Program Development, the 
Philadelphia Homeownership Center, Office of General Counsel, and the 
Quality Assurance Division. The Secretary also asked his Special 
Counsel, Bryant Applegate to monitor progress and keep the Secretary 
informed. This is a significant commitment of resources, and it 
demonstrates the importance the Secretary places on the outcome of the 
work of the Task Force.
Foreclosure Suspension and Re-review Completed
    Immediately following the April meeting and again at your request, 
the HUD Team met with other Task Force participants to redefine 
criteria to be used to reevaluate the 560 loans previously reviewed. 
Our first action was to notify mortgage servicers to suspend 
foreclosure actions on loans in this group that were in default and to 
suspend eviction actions on those loans that had already been 
foreclosed. These suspensions will be in effect until the Task Force 
completes its re-review to determine which loans were overvalued and 
which borrowers can be assisted.
    HUD's initial review approach had been to identify flipping 
activity and aim for a burden of proof that would support enforcement 
against the perpetrators. Working with the Task Force we developed re-
review parameters focused on borrowers assistance rather than 
enforcement, and overvaluation rather than flipping. All 560 cases have 
been reevaluated based on these parameters:
  --FHA insured loans on properties in Baltimore City
  --Origination date on or after January 1, 1997
  --Appraisal indicates that the property was overvalued by at least 
        120 percent or $10,000, OR
  --An automated value analysis indicates that the purchase price 
        exceeded an acceptable range of fair market value for other 
        neighborhood homes at time of origination, OR
  --Evidence of grossly deficient property condition at origination.
    Based on information available to HUD, the re-review identified 225 
borrowers whose properties are believed to have been overvalued. A list 
of the loans that did not meet the very broad criteria for 
overvaluation has been delivered to the members of the Task Force who 
generated the initial case referrals, with a request to provide HUD 
with any additional information that would support a finding of 
overvaluation.
    Of particular note is the disposition of the 41 cases referred for 
re-review by Senator Mikulski. Of these, 21 met the Task Force criteria 
for overvaluation and assistance is being provided to the borrowers as 
more fully described below.
Borrower Assistance Completed and In Progress
    Affected borrowers (plus others to be added in the future) are 
being provided some assistance by HUD and the Task Force, though the 
type of assistance available is dictated by circumstances unique to the 
borrower and the property. To date, the following assistance has been/
is being provided:
  --Foreclosure suspensions enforced
  --178 credit Explanation Letters mailed to borrowers
  --12 checks have been issued to provide relocation assistance
  --1 loan is being reinstated using HUD funds (partial claims)
  --1 borrower has qualified to retain possession through foreclosure, 
        sale to St. Ambrose and subsequent lease purchase.
  --93 borrowers have been offered the option of (1) relocation 
        assistance (2) loss mitigation or (3) or consideration by Task 
        Force housing counseling partners for the occupied conveyance/
        property repair/buy back option.
    Though the available assistance options do not fully address the 
damage suffered by many of these borrowers, it is important to 
understand that the Department is pushing the envelope of its statutory 
and regulatory authority in providing this level of assistance. One 
notable area of weakness is our ability to provide assistance to 
borrowers who are either current or only slightly delinquent on their 
mortgage but who need help to pay for emergency property repairs. The 
HUD team is working aggressively with the Task Force to leverage the 
Department's commitment with resources available through the City of 
Baltimore and other community based organizations to offer grants or 
low interest loan for property repairs. Specifically we believe there 
is opportunity to reallocate up to $1.5 million from the pending 
Neighborhood Initiatives Grant from HUD and earmark this money for 
assistance to borrowers affected by predatory lending.
New Case Referrals
    The City of Baltimore has established a Predatory Lending 
Clearinghouse and awarded a contract to St. Ambrose Housing Aid Center. 
The new evaluation criteria agreed upon by the Task Force is as 
follows:
  --Property is located in Baltimore City
  --The loan is currently insured by FHA and was originated later than 
        January 1, 1997
  --The borrower is not under investigation by the Inspector General or 
        Attorney General for complicity in a predatory scheme.
  --The property was resold at least once within 12 months of loan 
        origination at a price at least 120 percent of the original 
        sale price (or $10,000 more). OR
  --The property was in grossly deficient physical condition at the 
        time of origination, and this was fraudulently misrepresented 
        on the appraisal or loan documents.
    In concert with St. Ambrose, GOVAN and ACORN, the HUD team has 
developed effective, written procedures for the Clearinghouse, 
including a uniform intake process, a referral tracking log and clear 
delineation of responsibilities to ensure that borrower concerns about 
predatory activities are evaluated quickly and fairly. These procedures 
are in place, and new referrals are being processed.
Community Outreach
    The HUD team is focusing a significant level of attention on 
prevention of predatory lending activities through consumer education 
and community outreach. ACORN continues to be a valuable partner in 
this effort. Using funds provided in a special discretionary grant from 
HUD, ACORN is preparing brochures for general distribution, writing a 
predatory lending module for existing homebuyers counseling courses, 
developing curricula for consumer and non-profit organization training 
and developing materials for use at Homebuyer Fairs. All of these 
materials will be tested in Baltimore but will eventually be made 
available on a nationwide basis. During the next 60 days, HUD, ACORN 
and other Task Force Members are cooperating on these community 
outreach events:
  --May training for all Baltimore Area non-profits on indicators of 
        predatory lending and Clearinghouse referral procedures
  --Bi-monthly consumer education programs at the Pratt Library 
        beginning in May
  --June 16th Trolly Ride Homeownership event
  --June 30th Bank Fair.
Ownership Focus in the Disposition of HUD Homes
    The Department is pleased to report that, consistent with an 
overall decrease in foreclosures nationwide, the number of properties 
foreclosed in Baltimore is also down for the first half of fiscal year 
2001 by nearly 15 percent over the same period last year. Still, there 
are currently more than 600 HUD Owned homes in Baltimore City. In 
April, a new Task Force subcommittee was established to explore 
strategies to better target the marketing of these properties so that 
they will be available to owner occupants. I attended the first 
subcommittee meeting on May 3, 2001 along with Cheryl Walker, the HUD 
REO Director responsible for properties in Baltimore.
    During the meeting Cheryl agreed to expand the time period during 
which owner occupants have the exclusive right to bid on properties and 
to reinstate that exclusive bid period each time a property is re-
listed with a price reduction. We also offered to partner with the non-
profit members of the Task Force to pay for repairs on properties in 
their catchment areas if they are willing to identify and supervise 
qualified contractors. Finally, we discussed creating more flexibility 
within existing discounted sale programs to better meet community 
needs. HUD has encouraged the City and non-profit partners to submit a 
proposal for purchase of HUD owned property that is consistent with the 
goals of the City's Healthy Neighborhoods Initiative. Harold Young, 
Senior Community Builder in the Baltimore office is helping to 
coordinate this proposal.
                               conclusion
    Throughout HUD's year-long participation in the Baltimore Predatory 
Lending Task Force much good work has been accomplished. This 
testimony, focused as it is on the progress of the past 4 weeks, did 
not recount the impressive strides made in identification of predators 
or the enforcement actions already taken or in progress against them. 
Neither did it focus on preventative actions being considered by FHA 
and the mortgage industry to make it harder to commit predatory acts.
    Let there be no mistake that Secretary Martinez and the U.S. 
Department of Housing and Urban Development are fully engaged in the 
effort to combat predatory lending in Baltimore City and across 
America. But HUD does not stand alone in this effort. It will require 
the combined energy and contribution of all Task Force partners to 
protect the citizens of Baltimore from predatory and abusive lending 
practices. Thank you.
                                 ______
                                 

     Baltimore Predatory Lending and Flipping Task Force Year One 
                            Accomplishments

Borrower Assistance
    Since April 2000, the U.S. Department of Housing and Urban 
Development, in conjunction with the Baltimore Task Force has received 
and reviewed 557 cases of alleged predatory lending in Baltimore City. 
Of these 227 have met the Task Force definition of overvaluation and 
are being provided some type of assistance:
  --12 borrowers have received relocation assistance checks
  --1 borrower is receiving funds from HUD to reinstate her mortgage 
        and cure her delinquency
  --1 borrower has qualified to retain possession of her property 
        following foreclosure
  --178 Credit Explanation Letters have been provided by HUD
  --93 borrowers have received letters detailing the assistance options 
        available to them.
Prevention Actions
    While borrower assistance will continue to be an area of activity 
and concern, HUD believes the most effective long term solution to 
predatory lending is prevention and has made this a primary focus. One 
of the early lessons learned by the Task Force is that predatory 
flipping cannot happen without corrupt appraisers. During the past year 
HUD has implemented a wide ranging Appraisal Reform Initiative that 
will prevent appraisal fraud by:
  --requiring licensing and testing of FHA appraisers
  --expanding the appraisal report to include a full description of 
        property
  --condition and the requirement that the borrower receive a copy of 
        the property condition report prior to closing
  --providing for 100 percent statistical review of every FHA 
        appraisal.
    Other preventative measures include a provision of the new GSE Rule 
that became effective in January, which specifically disallows housing 
goals credit for loans with predatory features, and a proposed rule now 
in the concurrence process, that will make flipped loans ineligible for 
FHA insurance.
    Also under consideration are policy and regulatory changes that 
would require mortgagees to use fraud prevention tools to screen new 
applications for indications of flipping; place strict limits on cost 
and fees that can be charged in the origination of an FHA loan; and 
provide authority to hold mortgagees more accountable for the quality 
of the loans they purchase and/or service.
Consumer Outreach
    Consumer outreach and training is another important element of 
prevention. HUD has provided a grant to ACORN to produce brochures and 
develop consumer training materials for use in housing counseling and 
at homebuyer fairs. These materials will be tested in Baltimore but 
will eventually be made available on a nationwide basis. Upcoming 
Baltimore Community Outreach events include:
  --May training for all Baltimore Area non-profits on indicators of 
        predatory lending and Clearinghouse referral procedures
  --Bi-monthly consumer education programs at the Pratt Library 
        beginning in May
  --June 16th Trolly Ride Homeownership event
  --June 30th Bank Fair.
    Through the Neighborhood Initiatives Grant program, HUD is also 
funding a Predatory Lending Clearinghouse that will be work directly 
with HUD staff on the review of new predatory lending referrals in the 
Baltimore area.
Enforcement Actions
    The Department initiated a wide range of actions against more than 
140 organizations and individuals involved in FHA-insured loans in the 
Baltimore area. The origination and servicing practices of 54 lenders 
have been reviewed resulting in:
  --13 referrals to the Mortgagee Review Board for action
  --8 Lenders terminated, or proposed for termination under the Credit 
        Watch initiative; 4 placed on warning status
  --10 lenders under investigation by the Office of the Inspector 
        General
  --12 lenders placed in 100 percent post-endorsement technical review 
        status.
    Additionally, 2 real estate brokerage firms have been barred from 
purchase and sale of HUD Homes, 15 appraisers have been removed from 
the FHA Roster and 32 individuals have been referred for debarment, 
meaning that they will not be able to participate in any HUD program.
Continued Commitment
    Throughout HUD's year long participation in the Baltimore Predatory 
Lending Task Force much good work has been accomplished but there is so 
much left to do. Secretary Martinez and the U.S. Department of Housing 
and Urban Development are fully committed to the effort to combat 
predatory lending in Baltimore City and across America.

    Senator Mikulski. Thank you for that very thorough 
contribution.
    We now want to turn to Mr. Stephen Schenning the Acting 
U.S. Attorney from the State of Maryland, to tell us 
essentially where we are on the Federal prosecution of property 
flipping.
STATEMENT OF STEPHEN M. SCHENNING, ACTING UNITED STATES 
            ATTORNEY, DISTRICT OF MARYLAND
    Mr. Schenning. Thank you, Senators. Thank you, Madam 
Chairman and Senator Sarbanes. I am pleased to be here this 
morning to report to you on what Federal law enforcement is 
doing in this area.
    Senator Mikulski. Do you want to pull that microphone up?
    Mr. Schenning. I want to tell you what Federal law 
enforcement is doing in this area of mortgage flipping. 
Together with the FBI, the Postal Inspection Service, the 
Internal Revenue Service, and of course HUD IG, our office 
formed a task force to address criminally the problem of 
flipping. We assigned about ten Assistant United States 
Attorneys in Baltimore to address this. As Mr. Strong 
mentioned, Assistant U.S. Attorney Joe Evans is leading, 
chairing that effort in Baltimore.
    To date we have opened about 40 different investigations 
into mortgage flipping. That gives you some idea the breadth of 
the problem. To date we have charged 40 defendants, we have 
convicted 15, 2 have been acquitted, and there are 23 pending. 
Of those 23 individuals who are pending, we filed criminal 
informations against those. A criminal information instead of 
indictment indicates that there have been negotiations and 
there is a likelihood that the case will be resolved by way of 
a guilty plea.
    In terms of breakdown of defendants that I just mentioned, 
16 of those are flippers, the person behind the deal, the 
person who is buying the houses at a low price and then selling 
them quickly at a higher price and is usually the person that 
is orchestrating the whole scheme. Sixteen of those have been 
charged, 8 convicted, 8 pending trial. There have been 4 
mortgage brokers charged, 3 have been convicted, 1 is pending. 
Appraisers, there have been 3 charged, 1 convicted, and 2 
acquitted. Loan officers, 3 have been charged, they are all 
pending. There have been 11 straw purchasers, with 1 convicted 
and 10 pending. There have been 4 settlement agents, 2 
convicted and 2 pending. Two of those, I might add, of the 
settlement agents, were licensed attorneys.
    In terms of sentencing, the eight defendants that have been 
convicted that have been sentenced, one received probation, one 
who cooperated substantially with law enforcement received an 
18-month sentence, and the other six received sentences between 
30 and 36 months. Of course, in the Federal system that is no 
parole, so for white collar offenses those are substantial 
sentences.
    In one of the cases, the Beeman investigation, the 
sentencing judge agreed with our analysis that an enhancement 
of the sentence ought to be made. In other words, the sentences 
that two of the defendants got were higher than the guidelines 
ordinarily called for because of the impact on the community. 
This was in the north of Patterson Park area and the government 
argued and the judge agreed that the impact was so 
destabilizing that that justified an enhancement.
    There was also in that case, the government tries to, when 
it can prove restitution, we try to obtain that and get it 
ordered by the court. In two instances we were able to 
negotiate payments by the convicted defendants to the Patterson 
Park Community Development Corporation in order to help fund 
that agency's work at restoring that part of Baltimore City and 
to undo in small measure the harmful effects that flipping has 
inflicted on that neighborhood.
    I also want to mention, we have a Greenbelt office in the 
other part of the State and that office has been busy, too. In 
the past 18 months, the subdivision attorneys, U.S. Attorneys, 
have obtained five indictments. In my remarks I submitted I 
indicated four indictments. I found out over the weekend we 
actually unsealed another indictment, so the proper count is 
five indictments against 11 individuals involved in mortgage 
fraud schemes.
    Senator Sarbanes. Where is that located in the southern 
district?
    Mr. Schenning. Prince Georges County.
    Senator Sarbanes. Prince Georges County.
    Mr. Schenning. Yes, sir.
    There are indications and it is true that Baltimore is not 
unique in this mortgage flipping, that other jurisdictions, New 
Jersey, Milwaukee, St. Louis, and Los Angeles just to name a 
few, have also been hit. But in terms of our impression, we 
think that Baltimore has been hit harder. It is difficult to 
say with any, certainly for a prosecutor to say with any 
certainty, why Baltimore is more susceptible, but we think that 
there are a few features about Baltimore that may enable this 
scheme.
    First, the Baltimore row houses create an opportunity to 
make it appear that individual houses and individual 
neighborhoods are comparable when they are not. I am sure both 
Senators understand you can go three or four blocks in a given 
place in Baltimore City and the values are quite different just 
a few blocks away.
    The house market in Baltimore has traditionally been less, 
I think, than other places, so that out of town lenders, some 
of the--most of these houses involve FHA or HUD type loans, but 
there is also a sub-prime market that is involved. The lenders 
in the sub-prime market tend to be from out of State. So that 
when they are reviewing materials, looking at a house that is 
perhaps valued at $50,000, that will not leap off the page at 
somebody from Ohio or Chicago and think that it is perfectly 
reasonable, not realizing that $50,000 may be $30,000 inflated.
    Then of course, once this flipping starts it really can 
pollute, if you will, the whole database. Appraisals rely in 
large measure to comparables. You compare other houses in the 
neighborhood. Once these flippers start, and we have had a few 
instances of that, the same house, a house that was flipped was 
then used as a comparable for another flip.
    Senator Mikulski. Faux appraisals.
    Mr. Schenning. Exactly. So that one actually acts as 
polluting the whole database for people to come in and look.
    We have opened about 40 investigations, as I have 
indicated. We have about 25 still pending that we are still 
working on.
    I would like to make just two other points. That is that in 
the earlier testimony from Mr. Strong and the other people up 
here they were talking about the 600 block of North Robinson 
Street. We charged and convicted Robert Beeman, who was 
involved in activity there. We have pending charges by way of 
criminal information against Walter Dirsh, George Schiafano, 
Kay Realty, and just this Friday Andrew Bogdan. So just in that 
one block, just the 600 block of North Robinson Street, our 
office has gone after six individuals. So it gives you some 
idea how pervasive and how destructive it can be, just the one 
city block.
    I also want to endorse in terms of what can you do about 
it, prosecutors can prosecute. I think people understand you go 
after people for fraud. But the one thing that we have seen, 
and Mr. Graziano and Ms. Maggiano both echoed it, is the key 
point in the whole process, at least from our view, is the 
appraisal process. In every case that we investigate, in every 
case that we have prosecuted, the sine quo non of the scam, it 
does not work unless you have a faulty appraisal.

                           PREPARED STATEMENT

    That is the point, it seems to me, in terms of prevention. 
Of course, I am just a prosecutor. I am not here to tell the 
experts how to do it. But if there can be more attention 
focused on the appraisers, because the flippers cannot make it 
work unless they have got that phoney appraisal. If someone 
there is licensing through oversight at that part of the 
process, I think that there can be effective oversight of this 
problem.
    I think, from a prosecutor's standpoint, that is where I 
would start and that is where I would focus the attention.
    [The statement follows:]

               Prepared Statement of Stephen M. Schenning

    Senator Mikulski and Members of the Committee: I am pleased to be 
here today to report on the status of Federal prosecutions of property 
flipping in Baltimore. The first subpoenas were issued in late February 
of 1998. Since that time, the United States Attorney's Office, in 
conjunction with the United States Postal Inspection Service, the 
Federal Bureau of investigation, the HUD Inspector General, and the 
Internal Revenue Service has opened some forty separate investigations. 
These investigations invariably involve multiple individuals and 
entities, and oftentimes, there is substantial and dizzying overlap. In 
Baltimore, these investigations are monitored by approximately ten 
different Assistant United States Attorneys who have full caseloads in 
addition to the flipping matters. Nonetheless, in the past 2 to 3 
years, Federal law enforcement has made significant and, I think, 
commendable progress.
    While I cannot comment on pending investigations, I can speak to 
prosecutions that are in the public record. In that regard, let me 
provide the following statistics:

Defendants charged................................................    40
No. Convicted.....................................................    15
No. Acquitted.....................................................     2
No. Pending.......................................................    23

    Of the 23 pending charges, 12 of those are charges which were filed 
by Criminal Information.
    Types of Defendants Charged and Convicted:
  --Flippers--16 charged, 8 convicted, 8 pending
  --Mortgage brokers--4 charged, 3 convicted, 1 pending
  --Appraisers--3 charged, 1 convicted, 2 acquitted
  --Loan Officers--3 charged, all of which are pending
  --Straw Purchasers--11 charged, 1 convicted, 10 pending
  --Settlement Agents--4 charged, 2 convicted, 2 pending. The two 
        convicted settlement agents are both licensed attorneys
    So far, only 8 of the convicted defendants have been sentenced. One 
of those defendants received probation, and one who cooperated with law 
enforcement received an 18 month sentence. The others all received 
sentences between 30 and 36 months, without parole. Where it was 
possible to identify direct losses, restitution was ordered. In two 
instances, we were able to negotiate payments by the convicted 
defendants to the Patterson Park Community Development Corporation in 
order to help fund that agency's work at restoring this part of 
Baltimore and undoing many of the harmful effects that flipping has 
inflicted on that very fragile part of the City. Indeed, in a number of 
the cases we were able to convince the sentencing judge that enhanced 
sentences were appropriate by reason of the impact that flipping has 
had on the Patterson Park area.
    Additionally, over the past 18 months, the Southern Division of the 
U.S. Attorneys Office, located in Greenbelt, Md. has obtained 4 
indictments against 7 individuals engaged in mortgage fraud schemes. We 
have obtained five convictions to date. In one particularly complex 
Greenbelt case, the defendant refinanced his own properties using 
inflated appraisals, fictional lenders and phony pay off letters to 
defraud unsuspecting lenders. The funds that this individual sought to 
receive by way of this scheme amounted to over $500,000.
    There are some other Federal prosecutions of mortgage flipping 
across the country--some in New Jersey, Milwaukee, St. Louis, and Los 
Angeles to name a few. Nonetheless, it is our impression that Baltimore 
has been hit harder than other areas. It is difficult to know with any 
certainty why Baltimore would be particularly susceptible, but our 
general sense is that there are a few features that serve as enabling 
circumstances. First, Baltimore's row houses create the opportunity to 
make it appear as though individual houses and individual neighborhoods 
are comparable when they are not. Additionally, Baltimore housing 
prices appear modest to out-of-town investors and lenders who do not 
realize that a house selling for ``only'' $50,000 north of Patterson 
Park may be over-valued by $30,000. Finally, once the snowball starts, 
it becomes an avalanche so that property databases become polluted with 
flips thereby making additional flips appear to be normal transactions; 
neighborhoods deteriorate because of vacancies and foreclosures, 
thereby making more houses available to be snatched up by flippers; and 
unethical business practices become so customary that any normal moral 
compass that an appraiser, settlement agent or mortgage broker may have 
becomes skewed.
    I mentioned that we have opened about 40 separate investigations in 
the last 3 years. About 25 of those still remain open, not counting 
cases that have now been charged or concluded. Federal law enforcement 
in general, and the United States Attorney's Office in particular, 
views property flipping not only as a significant violation of Federal 
fraud statutes, but also as a practice that leads directly to the 
destruction of neighborhoods that are essential to the continued 
vitality of cities like Baltimore. Putting a stop to these predatory 
practices deserves as much prosecutorial effort as can be mustered, and 
this Office is committed to that effort.

    Senator Mikulski. Thank you very much, Mr. Schenning.
    Moving along in our hearing, I am going to do some of my 
first questions to you, Mr. Graziano. First of all, I just want 
two general comments. Flipping is a national problem. The Mayor 
said it. Secretary Martinez said it, Ms. Maggiano said it. The 
policy solutions, either legislative or regulatory are so 
enormous that we want to continue to use Baltimore as the 
laboratory, recognizing that Baltimore is not the only city. 
This is why we so appreciate your efforts, Ms. Maggiano, and we 
also will continue to follow up.
    In June there will be the HUD hearing before Appropriations 
Committee and we will have one segment of our questions devoted 
to this. Then I know Senator Sarbanes will be pursuing his 
legislation.
    Mr. Graziano, I am really hot on this prevention issue, 
because when we hear of all the resources that are going into 
cleaning up and clearing up, it shows why prevention is so 
important.
    Number one, I would like to ask from you a set of 
recommendations on how we can prevent section 8 in its efforts 
to move into homeownership. I do not want it here. I would like 
it to be submitted to the committee in writing, in terms of the 
prevention on section 8. That is the subject of essentially a 
different type of hearing. But I believe Ms. Maggiano and 
Secretary Martinez would be keenly interested in your 
recommendations.
    Second, your Baltimore City task force gave to Senator 
Sarbanes and I a list of what HUD FHA promised under Secretary 
Cuomo, what has happened and what needs to be happening. We 
would like an update on that. So as I understand it, HUD 
promised where the mortgages have been inflated it would be 
conducting its own appraisal reviews on cases. You say what 
needs to be happening is that FHA needs to deal with slow 
review appraisal processes.
    Has that improved or where are we on that?
    Mr. Graziano. That has improved at this point, but we need 
to make sure that there are adequate resources at HUD and FHA 
dedicated to continue that. But it has improved.
    Senator Mikulski. Well, Ms. Graziano, I know that is an 
issue that will be an interest of yours.
    The other issue was that after review FHA would insist 
insured buyers who were found to have mortgages above 30 
percent of appraised value to be able to be helped. Could you 
tell us what happened there? That is recommendation number two.
    Mr. Graziano. Yes, yes. My understanding is that HUD, FHA 
has in fact dropped a number of the limiting conditions and is 
looking at a much broader range. They are looking city-wide at 
this point, rather than just the five zip codes, and they have 
pushed the date back earlier, to an earlier date. I do not know 
the exact date on the reviews.
    Ms. Maggiano. It is January 1st, 1997.
    Senator Mikulski. Well, we will come back. There are a 
couple of other issues. One, that FHA would demand that lenders 
reduce the inflated FHA-insured mortgages to the appropriate 
levels, and if lenders refuse the mortgage--I am on page 2--
they would allow the borrower to sign over the deed to FHA and 
FHA would resell the property back to the borrower at the 
appropriate level.
    Now, this is one of the core of our making whole efforts. 
Could you elaborate on what you think has happened there and 
what more needs to be done by either you or HUD.
    Mr. Graziano. Well, my understanding is that HUD has made 
these efforts in a number of cases. They have been resisted by 
the lenders. They have refused to reduce the loans. As I 
understand it, there is some lack of clarity as to whether FHA 
has the current authority to impose that where the lender is 
not willing to voluntarily do it.
    I am not an expert on that particular section, but that is 
the advice I am being given. I would say that----
    Senator Mikulski. Well, Mr. Graziano, let us hold you there 
and turn to Ms. Maggiano, because this is one of the pillars on 
which our reform must stand.
    Could you comment? Do you have that chart, ma'am? Could my 
staff take that to Ms. Maggiano? You will see what it is. You 
are going to like this chart. I think you are the kind of lady 
who likes these Powerpoint checklists to get things done.
    Ms. Maggiano. I certainly see that written there, Senator 
Mikulski. What I would say is that FHA perhaps overcommitted 
what it was able to deliver. The section 203(e) of the National 
Housing Act has a clause called the incontestability clause, 
and that clause prevents us from denying an insurance claim--
excuse me. That prevents us from forcing a mortgagor to cram 
down a mortgage by threatening to deny the insurance claim if 
they do not. That was, unfortunately, really the bitter pill 
that we have learned over the last few months in trying to 
resolve the Baltimore problem.
    We had great hopes initially that we would be able to go 
back to mortgagees and ask them to do the right thing. We 
demanded that they do that, and they pointed to this clause and 
said: You cannot make us and we are not going to.
    Senator Mikulski. So essentially, Ms. Maggiano, you need 
new statutory legislation? You need new statutory authority?
    Ms. Maggiano. In order to use the insurance fund to pay 
borrower claims and to cram down mortgages or to require 
mortgagees to do that, it would require statutory authority.
    Senator Mikulski. Well, again, this is very complex 
information and I would appreciate if you could furnish to 
Senator Sarbanes and myself what your legal counsel and others 
have told you to really correct this situation, so we can 
ponder it and, again working with our Republican colleagues, I 
certainly will be discussing this with Senator Bond.
    I must comment, though Senator Bond is not at this hearing, 
he finds this whole predatory lending to be as despicable as 
us. So this is not Democrat-Republican. This is Team USA here.
    So I think we would appreciate getting your recommendations 
or a white papers so that the authorizers can ponder it and we 
can look at it as their appropriator colleagues. I think this 
would be a very important tool for us to get to it.
    Senator Sarbanes, do you want to pick up?
    Senator Sarbanes. Well, right on this point actually. First 
of all, we are awaiting from HUD your recommendations as to the 
statutory changes you need in order to enhance your authority 
to deal with some of these problems.
    Second, I want to encourage HUD to push the envelope on its 
authority under its existing legislation. For example, you had 
a credit watch situation in which your authority was 
challenged, as I understand it, to disqualify lenders; is that 
correct?
    Ms. Maggiano. I believe so, sir.
    Senator Sarbanes. That case went against you at the initial 
level, but was reversed on appeal. So at the appeals level your 
authority was upheld. So in a sense, on that issue at the 
moment you have a clear street and we urge you to press forward 
with that. We would be happy to talk with counsel at HUD about 
trying to move in other areas and sort of not backing off 
simply because some of the private parties say, well, we are 
not going to be cooperative.
    Now, in the one instance, of course, you were upheld by the 
appeals court in the end, and it might happen in other areas as 
well. We need to look at that. In any event, we also need to 
discuss with you what statutory changes you think are 
necessary. But we have to dry up this pool that enables people 
to function this way.
    Mr. Graziano, I want to ask you, what is the city's 
strategy to deal with the problem in the non-FHA arena? We are 
focusing on the FHA and we have got Ms. Maggiano now as the 
point person and we are very pleased that the Secretary has 
come through so quickly on that assurance that he gave to us 
about designating someone at the central office. We think that 
is very important, that we now have a coordinator to pull all 
this together.
    A lot of the focus, of course, has been on the FHA and HUD 
because that is a public agency and we deal in a public 
dimension in it. But this problem obviously, as we hear from 
our local people, extends out beyond HUD. So you are dealing in 
other areas where there is no HUD presence, as I understand it. 
What about that?
    Mr. Graziano. Well, that is obviously a tougher one. We do 
not have quite the hook there that you do with the FHA program, 
even with some of the current limitations. But I think it 
starts with a basic education program that we have talked 
about, the mass education program, the specific individual 
counseling for home buyers which we are trying to make 
mandatory, we are making mandatory in all of our programs.
    I made reference to a section 8 homeownership program that 
we will be creating. An important element of that will be 
ensuring that people are fully educated. Of course, because the 
dollars will go through our agency through section 8, we will 
be able to ask some of the questions, as you suggested earlier, 
where HUD could make that half-hour phone call, FHA could, 
before a loan was closed. We can certainly go through those 
kinds of initiatives, those kinds of questions, rather, under 
the section 8 homeownership initiative.
    I think there are also some other very basic things that we 
need to do that touch on this program, but that have a broader 
impact. That is to say, our code enforcement program is one 
that we are beefing up more and more each day and week. 
Fundamental code enforcement I think holds owners accountable. 
Those would-be speculators and so forth would be, we hope, 
discouraged from participating if they know that there is a 
greater watch over the condition of properties.
    The same thing would be said on the section 8 side for 
renters, the rental section 8 program also, much stricter 
inspections and holding landlords accountable.
    So there is a lot of up-front education on the one hand, 
helping wannabe home buyers, making sure that they have the 
wherewithal, that they can sustain the homeownership, but also 
holding--discouraging the involvement in our market of 
speculators who have no interest in stable neighborhoods, 
whether they be for rental property or for homeownership.
    Senator Sarbanes. Well now, Fannie Mae and Freddie Mac have 
both enunciated policies to try to dry up the availability of 
the secondary market for these sales. Is the city in touch with 
them?
    Mr. Graziano. We have been in discussions with them. I am 
not fully--I cannot give you a complete rundown at this point. 
But that is something we would continue to do.
    Senator Sarbanes. Now, is there an adequate database? I 
mean, obviously a Vinnie Quayle and Ken Strong and Ed Rukowski, 
who is here for the Patterson Park people--I am sure that when 
they see a certain name or a certain company they know enough 
that red lights go off. Now, is the city plugged into that?
    I mean, it seems to me we have experienced enough of this. 
Of course, Mr. Schenning is removing a lot of them from the 
playing field, thank heavens.
    Mr. Graziano. Right.
    Senator Sarbanes. And we encourage him in what he is doing. 
I think it is very important that one message that comes out of 
this hearing is that, you know, this is not a risk-free 
endeavor these people are in and some big bonanza and that we 
have got--you say ten Assistant U.S. Attorneys in this office?
    Mr. Schenning. Just in Baltimore.
    Senator Sarbanes. In the Baltimore office, working on this 
problem. That is a major task force. How many U.S. assistants 
are there in the Baltimore office?
    Mr. Schenning. Forty-seven.
    Senator Sarbanes. Forty-seven. So that is a major task 
force addressing this problem, and the sort of prosecutions 
that you are bringing is an indication of, I think, of the 
growing effectiveness of that task force. So the word needs, if 
it is not out there yet, it ought to be out there that the 
people engaging in these deplorable practices and exploiting 
people in the most gross fashion are going to pay a price for 
it.
    Now, you say these sentences are running about 30 to 36 
months?
    Mr. Schenning. Correct.
    Senator Sarbanes. And there is no time off of those 
sentences?
    Mr. Schenning. That is without parole. There is no parole 
in the Federal system. You can earn some good time credits, but 
it is about 5, 6. If you get 30 months, you are going to do 25 
months before you get released.
    Senator Sarbanes. So they are going to serve a substantial 
sentence off of this. There is also an effort to recoup in 
monetary terms, I gather, as well; is that correct?
    Mr. Schenning. We always look a restitution if it is there. 
We do financial backgrounds before a defendant is sentenced and 
we try to, if we can, individualize the restitution. Of course, 
in the cases a lot of times the victim, in say the Beeman 
investigation, the victim in terms of the prosecution was the 
out of State lender who had loaned the money and who had been 
stuck with it. That is one of the reasons that we ask.
    We knew that there is another victim here. Like the lady 
who was sitting in this chair, she is a victim, too. But in 
terms of a prosecution and restitution, the judge does not have 
any authority to order money to her, but what we did in the 
Beeman case was ask the court, at least in two cases where the 
defendants had money, ask them in one case for $30,000 and 
$40,000, for a total of $70,000, to go to the agency, the 
Patterson Park community agency--Mr. Rukowski I think is the 
head of that--money that the court ordered to that agency so 
they could continue their good work.
    Senator Sarbanes. Do you have a database that enables you 
to sort of send up the warnings as soon as you see certain 
entities moving around our city?
    Mr. Graziano. I am going to ask Joann Copes, my Director of 
Development, if you would indulge me, to respond to that.
    Ms. Copes. We are keeping data through the task force. The 
State Department of Assessments and Taxation has all the data 
on property transactions and they are an active member of the 
task force. The task force meets every 3 weeks. We have also 
relied heavily on the advocacy group, St. Ambrose. But we do 
have a formal relationship with Ken Strong, who is now with 
Community Law Center, on a consulting basis to provide that 
kind of information and data to us in the city.
    So I would say through the task force we are keeping data 
and are well aware of who the actors are. Of course, that is a 
changing landscape.
    Mr. Graziano. If I could just elaborate on the earlier 
questions, too. In some of my points I spoke of orally and in 
the written testimony as well, I focused on the appraisers and 
the licensing of appraisers. Mr. Schenning certainly pointed 
that out as well, that appraisal is the critical element of 
all, whether it be an FHA or a non-FHA loan. So to get at those 
non-FHA loans I think we have to focus on the recommendations 
here about appraisers.
    One is that in the FIRREA legislation I believe it allowed 
for discretionary or States having optional licensing, and 
Maryland is a State that does make licensing optional. Perhaps 
we should look at the being a Federal mandate for licensing of 
appraisers be mandatory.
    Then we talked about the de minimis provision that said if 
your mortgages are below $250,000 that there need not be a 
licensed appraiser. Well, 95 percent of the loans out there are 
less than that and in Baltimore probably more. So that we need 
to get licensed appraisers and they need to be held 
accountable.
    Senator Sarbanes. There are two approaches to that. One is 
to try to get a Federal standard that all appraisers must be 
licensed.
    Mr. Graziano. Right.
    Senator Sarbanes. Which would be nationwide.
    Mr. Graziano. Right.
    Senator Sarbanes. The other would be to close this gap as 
far as Maryland is concerned by getting Maryland legislation 
that says, at least in Maryland, as is the case in some other 
States, the appraisers must be licensed. In how many States 
must appraisers be licensed under State law, do you know?
    Mr. Graziano. I think there are something like half a dozen 
States that have it optional, I am told.
    Senator Sarbanes. We are one of only six where it is 
optional?
    Mr. Graziano. Something like that.
    Senator Sarbanes. In all the other States they require 
licensed appraisers, is that correct?
    Mr. Graziano. That is correct. The reason why that is 
important, of course, is because right now it is optional----
    Senator Sarbanes. You see, it would be different--that is a 
problem on a Federal standard because you have got 44 States 
who have no interest in the Federal standard because they in a 
sense are already doing it at the State level.
    Mr. Graziano. We can certainly work on it at the State 
level as well. The importance is that if you do not have--if it 
is optional and you lose your license, if that is the penalty 
imposed, that is not a terrible penalty because you can go off 
and continue to do your business without a license. So clearly 
it is important that the taking away of that license has some 
real teeth in it.
    Senator Mikulski. Picking up on what Senator Sarbanes said 
about this appraisal licensing, we would really encourage Mayor 
O'Malley to make this one of his legislative priorities in the 
next session of the Maryland General Assembly. We would like to 
know the other five States as well. But we think this would be 
an important Maryland self-help initiative.
    I want to compliment Delegates Rosenberg and Kreziak and 
MacIntosh on their efforts in this area. I also note that 
Councilman Kane was here and I see Council Keefer Mitchell, who 
himself has a very keen interest in this. Perhaps, Councilman, 
you could work with the delegation as they go to Annapolis on 
this, because I know you are hot on this topic, too. We are 
glad to see you this morning.
    Picking up on our U.S. Attorney, Mr. Schenning, I was 
really struck by the ten different Assistant U.S. Attorneys on 
this. This approximates about 20 percent of our caseload. Then 
when you think about what it takes--here is my question. Number 
one, how much is the U.S. Attorney spending on it? Do you have 
enough resources? This really has to show what kind of urgency 
we need to do the prevention and intervention.
    Mr. Schenning. The ten that are assigned to these cases, 
that is not their only assignment. They have other commitments, 
too.
    This might give you some insight, Senator. Two cases have 
gone to trial so far. Samson U. Gorgy, who is an appraiser; in 
that case--he was in the Beeman investment.
    Senator Mikulski. Oh, I am familiar with him.
    Mr. Schenning. He went to trial and it took 4 weeks to try 
that case in front of Chief Judge Motts. He was the sole 
defendant who actually went to trial.
    The other case that went to trial, there were three 
defendants, two appraisers and one of the flippers, before 
Judge Smalkin, I believe. That case took 3 weeks. So 2 trials 
that we have taken, taken to trial; 1 was 4 weeks, the other 3 
weeks plus. It was actually into the fourth week. That is just 
trial time. So it is a tremendous--these cases are complicated. 
Anybody that has ever gone to a settlement on their own house--
--
    Senator Mikulski. We understand they are complicated. How 
much is it costing you?
    Mr. Schenning. I guess I cannot give you statistics, but it 
is a tremendous undertaking.
    Senator Mikulski. Well, we would like to know it. I will 
tell you why, because, you see, we have got to talk about the 
cost to everybody. The FHA, the taxpayers are being ripped off. 
I know this is one of the reasons Mr. Martinez feels so 
outraged. There are two kinds of locusts and predators that are 
hitting our Baltimore City. One sells the white powder of 
cocaine and heroin, and we know you are working on that with 
local and State. Then there are the white collar predators, 
equally the locusts, destroying the stressed neighborhoods, 
turning them into siege.
    Now, we are on your side. The reason is--this is in no way 
a criticism. It is to show the cost of failing to have the 
right prevention, statutory and other interventions in place. 
Do you have enough resources to be able to do this?
    Mr. Schenning. Well, I think we move--you also know that we 
are doing tons of gun cases that are coming out of Baltimore 
City. We have a whole floor of people dedicated to that. The 
drug cases, we have that. Then in the white collar section--we 
could always use more people because the assistants, they are 
not just doing these cases. They are doing other cases, too.
    Senator Mikulski. Well, I just want to say thank you to 
you, your team, to all that help put the cases together, that 
was community-based law enforcement, the techno-databases, 
everything, because I believe that your indictments and then 
subsequent convictions have really had a chilling effect, that 
we are really serious. This is not some toothless wonkie public 
policy seminar being run by Brookings or Heritage. We are in 
this.
    Again, the model--and we want to thank you, and we know it 
is happening, too, in Greenbelt. We know that flipping is in 
Baltimore County, Prince Georges County, even some tell-tale 
signs in Montgomery. Where there is stress, the predators come 
in. So we want to thank you and as we move forward on State, 
Justice, Commerce Approps we would like to know what we can do 
to be helpful to you.
    I am sorry, Senator Sarbanes. Did you want to ask a 
question?
    Senator Sarbanes. I just want to say, presumably as you 
bring these trials and gain these convictions you build up a 
momentum that leads other people that are indicted often to go 
ahead and enter a guilty plea. I urge you to really press hard 
with them and make it very clear that you are going to take 
this thing right down to the end if necessary. The more I think 
you reflect that attitude and gain some successes in expressing 
it----
    That is a siren warning these people of what is coming.
    Senator Mikulski. That is exactly right.
    Senator Sarbanes [continuing]. The more you can, I think, 
get more accommodation from the others you bring these 
indictments against. Of course, the whole impact of that is to 
send a very strong and clear warning signal to these people 
that we are just not going to have it. We will find you--if you 
need the resources, let us know. We will find the resources. 
But these people have been engaged in absolutely despicable 
practices.
    They are not performing some sort of honest function where 
they are really trying to provide a service for which they get 
a reasonable remuneration, which is sort of how the system 
operates. They have set in there to just abuse the system and 
to exploit people that are unaware, and then they say, well, 
they ought to know better, you know, caveat emptor and all the 
rest of it. But they use all these techniques to lure them into 
this situation, and once they get them in, then they have other 
techniques to deepen people's involvement and the extent to 
which they are being exploited.
    So you are performing a very significant function. I join 
Senator Mikulski in commending the U.S. Attorney's office.
    I want to thank Ms. Maggiano. We are glad you are there. I 
am sure we will be at you from time to time, but I must say I 
think you have come in today and in very short order indicated 
a clear working plan on the part of the Department. I have 
confidence in your ability to sort of hold it together and to 
work with--we think our nonprofit sector here is first rate, 
and working with the city and the nonprofit sector we think we 
can crack this thing. So thank you very much.
    Ms. Maggiano. Thank you.
    Senator Mikulski. Senator Sarbanes, I just have a little 
bit more before we close out.
    Ms. Maggiano, you of course have heard from our U.S. 
Attorney and we are not involved in any of the pending cases, 
but really the cost. I am sure when you convey this to 
Secretary Martinez and even to Attorney General Ashcroft you 
will see this.
    You listened to the testimony of Mr. Graziano in which he 
has about 11 or 12 recommendations. Do you have any initial 
comment on those or do you want to study these more and advise 
the appropriate committees on how you think we should proceed 
or how we could recommend to Mayor O'Malley, particularly where 
there might be State changes, for him to take up the cudgel, 
both with himself and, I might add, the other big seven 
executives if this is happening in the Prince Georges and 
Montgomery and Baltimore Counties, etcetera?
    Ms. Maggiano. Well, first I thank you for the courtesy of 
letting me give you a more formal response rather than trying 
to solve very, very difficult problems sort of off the cuff 
after a month's worth of involvement in this process. But a 
couple things I certainly can address. One of those that has 
been sort of floating around during the testimony today is the 
disposition of HUD REO property, HUD-owned real estate.
    Senator Mikulski. We want to hear about that.
    Ms. Maggiano. I do want to commit to everyone in this room 
that HUD is going to be working very aggressively, both 
internally and with nonprofits, to put together a property 
repair pilot, because we feel that in many ways that is the 
biggest stumbling block to homeownership. The properties are 
just not in a condition that most homeowners can readily take 
on the challenge of buying them and getting them insured. So we 
are going to be working on that.
    We are going to be using our 203(k) loan program more 
extensively in Baltimore. We think that that will help get some 
of these properties repaired and get them into private hands as 
well.
    We would like to use a prepurchase housing counseling pilot 
for the REO properties as well, because we think that the 
recommendations for prepurchase counseling that have been made 
here have merit and we would like to test them on the REO 
portfolio because it is a portfolio that we can control and can 
maintain.
    Senator Mikulski. This was one of the set of 
recommendations that came from Quayle-Strong.
    Ms. Maggiano. Yes.
    Senator Mikulski. Are you announcing today or are you 
considering today Baltimore being a pre-pilot program?
    Ms. Maggiano. Well, I had actually already discussed with 
Vinnie using the REO portfolio as a pilot for prepurchase 
counseling. So we will be pursuing that. That is not the same 
as the entire FHA new origination portfolio.
    Senator Mikulski. We understand that this is a test to see 
how this would work; am I correct?
    Ms. Maggiano. That is correct.
    Senator Mikulski. That sounds excellent.
    On behalf of Senator Sarbanes and I and our other 
respective committee chairs, we would like your analysis or 
comments on this. This takes me then to some closeout things. 
What we need from you, Ms. Maggiano, is number one to stay 
engaged. First of all, we are happy to have you. We think that 
this is really the kind of problem-solving, pinpointing that we 
had hoped for in the Baltimore laboratory.
    Second, for you to provide recommendations to Senator 
Sarbanes and myself and our respective chairs on both the 
issues related to Baltimore, and nationally, how this would tie 
into both authorizing and appropriations. If you could do that, 
it would be terrific.
    The Baltimore City task force gave us this checklist that 
we have operated off of. We would like very much for it to be 
updated and if we could have monthly reports to see how we are 
doing, so nothing falls through the cracks again. I believe 
that in this room there is real goodwill, and if there is 
goodwill we are going to find a way to actually do problem-
solving.
    So we would like these monthly reports. We would like to 
have a status report on where we are now--I think some have 
been accomplished--and where we need to go.
    Now, I tell you, when I listened to our nonprofits and our 
citizens I really had a hard time following this. The reason I 
say this--I mean, I know it, but if we go to explain changes to 
our colleagues--we have been at this for more than 18 months in 
really various cities. Of course, each step is another misstep. 
I wonder if we could have one of those charts that say, first 
of all, prevention, point one, what goes wrong, what needs to 
be done; what goes wrong, what needs to be done. Then once they 
enter into actually being a homeowner, like Ms. Adams and Mr. 
Smith.
    But you see what I am saying? Not a Rube Goldberg chart 
awash with bureaucracy and so on, but what is broken and what 
needs to be fixed. Then also this whole cleanup process, 
because we would like to be able to explain this to our 
colleagues. I will tell you, that again, as everyone says it is 
so complex that people lose interest, and we do not want them 
to lose interest. We want them to have a great sense of 
urgency.
    So if we could have that as a tutorial, as kind of a 
teaching tool, for example in preparation for the June 20 
hearing, I think it would be a big help. Not with numbers and 
statistics, but really the story of like through one person and 
what goes askew.
    There are many more questions that we can ask. But you see, 
again, we said that this was a work in progress.
    We want to thank everybody who has participated. We have a 
lot more work to do both in the streets and neighborhoods 
through our Baltimore City task force and working with HUD, 
with our U.S. Attorney. Mr. Graziano, we hope you are going to 
keep Ms. Copes as your point person as well.
    Mr. Graziano. Yes.
    Senator Mikulski. So we think now we have the right people 
and we have the momentum. So we want to thank you for your 
testimony, but also for your active engagement. I cannot say 
enough, as Senator Sarbanes said, about our nonprofit advocacy. 
We thank you for your continued vigorous championing of both 
the needs of our community and on what is the gouging of the 
taxpayer.
    To you, Mr. Schenning, thanks for all the work, and please 
thank the U.S. Attorney staff for what they are doing.
    Ms. Maggiano, we are glad to see you.

                         CONCLUSION OF HEARING

    With this, the committee is going to recess, the VA-HUD 
Subcommittee is recessed, until tomorrow at 10:00--no, 
Wednesday at 10 o'clock, when we will be taking the testimony 
of FEMA and how they are going to respond to natural disasters 
and to terrorist attacks.
    [Whereupon, at 12:04 p.m., Monday, May 14, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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